The European Debt Crisis and the Euro - Page 136

On July 09 2013 19:48 Flyingdutchman wrote:


I'd say the Greeks should worry about staying ahead of Zimbabwe. But all joking aside, they don't need to be more productive than Germany on a whole. The way I see it is that the current formal and informal institutional framework is not conductive for sustained growth in the long run.

The reason why I feel this is the time for reform is because reform is ultimately only really possible after a crisis, you cannot purely look at this in economical perspective without applying the political constraints to decision making. This does not only apply to Greece but the other countries in EU and the EU political framework as well. The EU monetary union certainly has flaws and they should be adressed, but that does not mean there isn't anything wrong in the long term strategy that the member countries are displaying. Wouldn't it be better if you go back and look at the replay of a game you lost to see where you could have done better instead of going on a forum and crying imba?
And when you talk about sustainable growth models, are you talking in the sense of endogenous growth models or sustainable as in natural resources? I was talking about endogenous growth, maybe I should have called it sustained instead of sustainable growth. Quite frankly I am quite surprised at how easy you dismiss things that do enable you to be 'right' yet you embrace things like the rational expectations hypothesis which can just as easily be dismissed when you look at empirical evidence.
You must not forget that economic research is done to better understand the sources of growth. They produce stylized facts or indicate some empirical issues that can be built upon to better understand all the complexities you mention. Things like the rational expectation hypothesis are assumptions made to try and explain behaviour in a model. Can you honestly say that you have worked with the mathematical models, as in doing them yourself? If not, it is understandable that you do not realize how much changing the assumptions will affect how well the model fits with what we can observe. It is therefore not very conductive to cherrypick certain assumptions (like the rational expectations hypothesis), when they happen to fit your world view in a theoretical sense and disregard them completely when they don't. That implies you are just trying to be right instead of building your understanding of the real world, which is ultimately the goal of economic academics.

Why wouldn't you be 'for' inflation if you really believe it is a neutral policy instrument that can solve the debt and deficit problem for Greece? That aside, the quote from Krugman is from 2003 and regarding US deficit spending to finance their war effort. He changed his stance on deficit spending and printing money in the current situation. The quote was primarily given due to the whole 'irresponsible governments' part. I'd suspect that his proposed solution to the political goal fits his view on sound economics, but does not necessarily imply he feels it would be the right policy goal to go for in an economical sense in the first place. In that regard he is mirroring what Friedman said, namely that the policy goal of a political and monetary union is more appropriate to the United states than Europe.

Edit: I see I have accidentally cut out a large part of your quote and have therefore not responded to any of it. I have no time left right now, I may come back to it if you want.

On July 09 2013 23:45 Flyingdutchman wrote:


You certainly have had lots of practice, and have also shown that it can go wrong as well

Raising labour productivity is indeed harder than letting exchange rate float, certainly in the short run. But that is basically my point, a structural improvement is harder than a temporary one but that does not say anything on which would ultimately have better results. It will depend on your time frame of preference (I'd rather look at a 100 year period than a 4 year period) At least that is the way I see it. Political reforms are historically only possible in time of dire need because of uncertainty on who will carry the initial burden of reform. If you only have losers then the chances of generating sufficient political support for reform is easier than when you have a group of winners that will probably leave the status quo unchanged. If you are interested I can link some research papers that formed my opinion on this matter of reform timing.
That aside, I agree it remains wishful thinking whether reforms change the institutional framework for the better, or in the case of cultural influences are actually feasibly changeable. But if I look at IMF reports to see what specific institutional improvements have been proposed and what they are working I'd say it will certainly help. Subsequently, you can also see that the willingness and effectiveness to reform in the areas where there are winners reflect what I have said about winners and losers above, like tax evasion or downscaling the public sector.

So the TL;DR would be: reforms can lead to structural improvements, in some cases they are even inevitable. But reforms are more likely after a crisis, the only question that remains is after how many crises a country will finally have the political will to follow through on what is eventually needed.

On July 10 2013 01:34 Flyingdutchman wrote:

You are mixing things up, there is no tradeoff between output and inflation in the long run. However there is a tradeoff between temporary short run employment boosts and pursuing a low inflation target, which is what the actual decision for policy makers comes down to. And what I've been saying all this time. Expansionary monetary policy is a tool used by policy makers to boost employment above their natural level. Money growth, in the long run, remains the key determinant of inflation, regardless of the specific assumption you make on expectations.

Admittedly, policy decisions are left to the discretion of the policymakers in the various countries, and what is optimal varies from region to region and even from sector to sector. The political process will always have an influence unless we switch to a dictatorship. I accept that fact. As of now, Greece is in a monetary union and therefore only really has control over fiscal and institutional policy. The have some constraints on fiscal policy right now, so realistically institutional improvements are all they have left to relieve those constraints on their fiscal policy. If Greece would step out of the Eurozone I will focus my theorizing to the new situation.

Your are stating an assumption as a fact. If you really think R&D, education, health, human capital, and public infrastructure can't be done without the state you have an extremely unrealistic world view. The question is whether the market can determine optimal levels on its own. Things like military/defence are clearly not optimal when left to the market. R&D and education will have a mixed bag of results both in terms of market and government efficiency in determining the optimal level. Healthcare can be done optimally. But in the Netherlands for example, the reforms in combination with the guaranteed demand has mostly led to rent seeking instead of production and quality improvements (on the whole). Infrastructure is quite clearly something the government should handle, at least for roads. They require huge investments that will accumulate benefits over very long periods of time and thus benefit different generations. In any case, it would be a false assumption that governments will always have a better result than market forces for the things you mentioned. Whatever levels of public services the electorate decides to demand from their government is up to the voters, but there is a natural constraint, namely that it should be affordable.

You seem to forget that there are two sides to competivety, on one side you have productivity and on the other hand you have the costs, like wages for example. In one of the spoilers in the above quotebox you asked why higher labour productivity in France somehow did not translate to better competitiveness vis-a-vis Germany. What matters for this specific component is how labour productivity relates to to the wages.
And I'm not sure if you are talking about 'green' development or permanent development when you say sustainable development? I was talking in the temporal sense.

On July 10 2013 07:12 Flyingdutchman wrote:


Well you are free to believe want you want to believe, I'm telling you that you are misinterpreting things here. If you don't believe me fine, would you believe Mankiw? He writes economic textbooks you know This is the conclusion he came to in his paper 'THE INEXORABLE AND MYSTERIOUS TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT'
+ Show Spoiler +
Other than that I do not know what to say except opening basic macro textbooks.

Where did I say that public infrastructure was not best left to governments? Again, you either have difficulty reading, comprehending english, or are just very selective in what you actually read. The role of the state in R&D is to finance possible 'blue skies research' where possible real world application is not immediately apparent. R&D with direct applications are better handled by the private sector. And there are loads of privately funded Universities, did you ever bother to look into this? Human capital? Aside from schooling, the majority of human capital is formed by actually working and on the job training.

That is because you logically contradict yourself sometimes. Coincedentally, I'm not the first one in this thread to call you on that. Namedropping and paraphrasing is not the same as quoting by the way, just so you know.

Most economists no longer use the Phillips curve in its original form because it was shown to be too simplistic. This can be seen in a cursory analysis of US inflation and unemployment data from 1953-92. There is no single curve that will fit the data, but there are three rough aggregations—1955–71, 1974–84, and 1985-92—each of which shows a general, downwards slope, but at three very different levels with the shifts occurring abruptly. The data for 1953-54 and 1972-73 do not group easily, and a more formal analysis posits up to five groups/curves over the period.
But still today, modified forms of the Phillips Curve that take inflationary expectations into account remain influential. The theory goes under several names, with some variation in its details, but all modern versions distinguish between short-run and long-run effects on unemployment. The "short-run Phillips curve" is also called the "expectations-augmented Phillips curve", since it shifts up when inflationary expectations rise, Edmund Phelps and Milton Friedman argued. In the long run, this implies that monetary policy cannot affect unemployment, which adjusts back to its "natural rate", also called the "NAIRU" or "long-run Phillips curve". However, this long-run "neutrality" of monetary policy does allow for short run fluctuations and the ability of the monetary authority to temporarily decrease unemployment by increasing permanent inflation, and vice versa. Blanchard (2000, chapter 8) gives a textbook presentation of the expectations-augmented Phillips curve.
An equation like the expectations-augmented Phillips curve also appears in many recent New Keynesian dynamic stochastic general equilibrium models. In these macroeconomic models with sticky prices, there is a positive relation between the rate of inflation and the level of demand, and therefore a negative relation between the rate of inflation and the rate of unemployment. This relationship is often called the "New Keynesian Phillips curve." Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papers that incorporate a New Keynesian Phillips curve are Clarida, Galí, and Gertler (1999) and Blanchard and Galí (2007).

Lets not forget that the state itself can be quite inefficient. I hope they seize the moment here in the Netherlands to do something about how they manage large infrastructural projects like Betuwelijn and Fyra.

On July 10 2013 15:34 Flyingdutchman wrote:

At least I can read...

I'd say states are developed wouldn't you say? We just need to improve them, that is what I've been saying all the time.