Monday, July 27, 2015

Ben-Gad and the Minotaur

Michael Ben-Gad has a smashing review, "Into the Labyrinth", of Yanis Varoufakis' The Global Minotaur (Disclaimer: I have not read it and don't intend to.) It's a great piece of writing as well as a cogent analysis. Some excerpts:
"The idée fixe that dominates The Global Minotaur, and apparently dominated Mr Varoufakis’s squabbles with the other Eurogroup ministers of finance, is that some countries are inherently more productive than others and therefore always generate current account surpluses, while others always generate deficits, and fixed exchange rates or monetary unions only exacerbate this imbalance. Hence, for the world economy to function, the surpluses need to be recycled though a system of regular transfer payments from the core to the periphery.
Why do these imbalances emerge? According to the theory of comparative advantage as formulated by David Ricardo in the early 19th century, different countries specialise in the production of particular goods and then exchange them for others, and trade is mutually beneficial even if some countries are more efficient at producing all goods. Mr Varoufakis’s theory rejects all this. Instead, he argues, some countries are destined to specialise in the production of goods and services, while others on the periphery will forever specialise in consuming them. Put into layman’s terms, what this means is that the people of Germany, the Netherlands, and Finland produce cars, wooden clogs, or mobile phones and sell them to the people of Greece, who pay for it all with money – and to make this trade sustainable the cash needs to be regularly replenished in an endless loop by the people of Germany, the Netherlands, and Finland.
This is a story we hear quite often beyond Mr. Varoufakis -- that a currency union requires countries to be similar, with similar productivity. I'm glad to see it so effectively skewered. In Ricardo's famous example, Portugal sells wine to Britain, which sells wool to Portugal, even if one is better at both than the other. They were on a common currency, gold.

On predictable US-bashing:
In Mr Varoufakis’s world the biggest villains are companies such as Walmart that exploit their efficiency to immiserate communities by making them pay less And of course the worst thing about Walmart is that it is American.
....Apparently, between the end of the war and the collapse of the Bretton Woods agreement in 1973, the Americans had a global plan, helpfully labelled ‘the global plan’, to dominate the world by permanently running current account surpluses and paying down its debt. Then this ended and was replaced by a new global plan to dominate the world by running permanent current account deficits and letting its debt soar. Devious Yanks. 
This last paragraph gets the golden skewer award for prose.
First,  he would have all remaining government debts still owed to banks written off. Why? Well, everyone hates banks, and it is apparently a neoliberal myth that their shares are owned by pension funds, university endowments or just ordinary people saving for retirement. Banks are really owned by Bond villains who live underneath hollowed-out volcanos.
Second, a substantial part of the remaining debt – about 60 per cent of GDP – would be mutualised across the eurozone so that, whenever the spirit moved them, governments could costlessly default on their bond payments, each one safe in the knowledge that any repudiated debt would immediately become an obligation for the taxpayers in the 18 remaining countries – unless, of course, they defaulted first. This is a variation on the prisoner’s dilemma game, but on steroids. 
Oh, I give up, just go read the whole thing.

Then read his equally good review of Thomas Pikettty, from a year ago, which starts
Reading Thomas Piketty’s Capital in the Twenty-First Century from front to back was a mistake.
Better to read the last hundred pages first, with their recommendations for the confiscation of wealth and marginal income tax rates nearing 100 per cent, and then read the preceding 470 pages to decide whether the flimsy evidence, conjecture and questionable theories the author offers justify such draconian measures....


  1. Just to tease you, I want to add to your despair about Yanis, According to Varoufakis' Wikipedia bio:

    "On 22 January 2015, the International University College of Turin awarded to Varoufakis a Honorary Professorship in Comparative Law Economics and Finance for his extraordinary theoretical contribution to the understanding of the global economic crisis."

    There you have Cochrane... did you ever get such an award, for "extraordinary theoretical contributions to the understanding of the global crisis"?? :-)

    But, alas, I was born south of the border, in South America somewhere, where these types (still) abound. "Dependency Theory", soft- and hard-core Marxism, "Center-Periphery" crap, all of this, I had to go through at the University. So, no, Varoufakis' crap does not surprise me one bit.
    What *does* puzzle me, though, is: what the heck did he learn at the University of Essex, where he did his PhD in Econ? Essex is supposed to be a decent place for Econ.

  2. Regarding Piketty, Steve LeRoy's two-page note "Piketty's r > g" makes a similar point. See:

  3. A Minotaur? Do the Illuminati, Elders of Zion, Freemasons, Bilderbergers, Trilateral Commission, Skull and Bones, Club of Rome, Council on Foreign Relations, Dick Cheney and Sauron know about this? This could be very dilutional for the "Lord of Darkness" pool.

    Doesn't this really just come down to the inevitable results of painting over economic dysfunction with debt? As Polonius said, "borrowing dulls the edge of husbandry". The Greeks were filling in their productivity gap with borrowed money, and someone was foolish enough to lend it to them. This movie is playing in theaters all over the world.

  4. I don't think that the argument is that the a currency union requires participants to be similar. I think that the argument is that it requires them to be unified. The argument isn't original to me: But we citizens of Connecticut don't vocally object to out tax dollars being sent south to support Mississippi (although if we were actually asked about it, we probably would object). Germany (home to arguably the most incompetent bankers the world has ever seen). wants all of the benefits of a currency union without any of the responsibilities of participating in a politically united Europe (which was the whole point in the first place of starting a currency union).
    I find it creepy that Germany, a country that defaulted twice on its debts in the twentieth century) starts talking about morality when its bankers made a bunch of lousy loans. Frankly, I find it creepy when Germans start preaching morality on any subject. If it wants to do something useful it should locate a few auto parts plants in Greece. (Again, a point that is not original with me).

  5. In the United States metropolitan areas continuously subsidize rural areas through the auspices of the federal government.

    Of course the free market solution would be for rural areas to depopulate even further and to stand on their own two feet. It is an interesting question whether Greece can depopulate and send its people to Germany.

    I think a better choice is for Greece to have its own very cheap drachma and they provide hotels, beaches and sun to the Northern Europeans.

    Yes, Greece should cut structural impediments. The US should not subsidize rural America. But some things never change.

    1. Greece has actually been "depopulating" for a century or more: there is a large Greek diaspora in the US and elsewhere.

  6. The Sun goes around the Earth. It is obvious, a no-brainer. Just look: It appears at one horizon, goes up and around, then down at the other horizon.

    Equally obvious. Spending money creates wealth. See how people's eyes light up when they receive money. Businesses prosper when they receive money. Consider your sadness when you spend money, even if you get some (overpriced) thing in return. The entire engine collapses when there is no money to spend, to make the machines run.

    So, some countries like Germany are burdened by being producers, and they need customers to prosper. Countries like Greece are no good at producing, but they can do more than their part by spending to keep the great machines running. This may require periodic defaults with more loans, but they are willing to do the hard part, spending money to keep the productive wheel going.

    Within a country, giving money to the poor and unworking serves the same purpose. They spend money quickly, keeping the productive forces employed. Giving them money is the essence of recovery from recessions. The supposedly "productive" people would have nothing to do without this spending. Their wealthy lives depend on it, and giving out money to spend is well worth the illusion that poor or unproductive are getting something for nothing. They are keeping the wheel spinning with prosperity for all.

    Karl Marx discovered and explained all of this 165 years ago. The world is a slow learner. Fortunately, Yanis Varoufakis continues the educational effort to correct the short-sightedness of the capitalists, the philisophically ignorant producers.

    Motto: Money has true value, and only governments create money. The things bought with money are only social constructs, mere consumer goods, here today and gone tomorrow. Money is philosophical and eternal.

  7. My understanding of Varoufakis' position is not in agreement with Ben-Gad. As I understand it, Varoufakis is starting from basic international trade. The definition of GDP: Y = C + I + G + (X - M) can be rewritten as (Y - T - C) + (T - G) = I + (X - M). That is private savings in the domestic economy plus public savings in the domestic economy exactly equals investment in the domestic economy plus the trade deficit/surplus. The old S = I identity with the possibility of investing some of your savings abroad or foreign savings to be invested domestically. Savings result from maximizing utility subject to constraints where intertemporal consumption is the choice variable. More patient people will be willing to save more than less patient people. The savings and especially the trade balance represent a residual after all decisions have been made.

    In an economy that is as unhealthy as Greece (we have 25%+ unemployment), who will hire at current wages? Wages have to drop substantially in order to make it worth while to use Greek labor for anything. German labor is way more competitive. But dropping wages is always difficult. Because of the common currency, it is not possible to achieve the drop through international exchange rates. If Germany would consent to Euro inflation, the change could be achieved via inflation in Germany and northern Europe with Greek prices remaining low. But Germany will not consent. Thus Germany continues to run massive current account surpluses while Greece, Italy, Spain, etc. match with deficits. The deficit nations would like to become more competitive, but they are in something of a bind. The private sector has great difficulty saving as unemployment is so high. The public sector may be running a primary surplus, but all of that and more goes to service the debt. The result is that as wages slowly drop and GDP drops faster than the debt, the fiscal position - both private and public - becomes even less sustainable. It should be fairly obvious that Greece is not able to pay back the debt owed. In such a situation a default is really the only solution. Short term agreements may keep the nominal fiction that is the Greek debt from a default, but sooner or later it will (has) fail.

  8. Its now time for America and other countries to outsource their jobs to Greece for heaven sake!

  9. Mr Cochrane I would like you to give you your job pontificating about the advantages of free and flexible markets etc from your position as tenured professor.

    I would like you to get involved in the negotiations re Greek debt for two reasons:

    (1) You will understand that the theories that you teach are ridiculous, irrelevant and useless. In fact all your students who put their money where their mouths are actually know this - and I suspect, deep down, so do you.

    (2) You will get some idea about the messiness of reality and the what the actual difficulties are in dealing with real world problems are.

    (3) We can see how well you do when actually put to the test vis-a-vis Varoufakis.

    Until you do that, all that you do from your job which is completely free from any real performance assessment (and this goes for Sargent and Fama as well) is absolutely meaningless.


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