The Financial Times has an article discussing the situation in Greece, which is described as being pretty bleak.  Living standards have fallen significantly:

The new report was prepared by IMF staff ahead of a February 6 board meeting to discuss the fund’s participation in an EU-led €86bn bailout of Greece and signals the continuing hard line the IMF is taking on debt relief for Athens. It offers a bleaker view of Greece’s economic dilemmas than an analysis prepared last year, warning that the debt load is “highly unsustainable” and would not improve even if it implemented further reforms recommended by the fund. . . .

“Even with these ambitious polices in place, Greece cannot grow out of its debt problem,” IMF staff warned in the report, seen by the Financial Times and drafted as part of the fund’s annual review of member economies. “Greece requires substantial debt relief from its European partners to restore debt sustainability.”

The IMF declined to comment, citing a policy of not commenting on leaked material.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

In contrast, the Germans believe that the Greeks need to tighten their belts, and get on with economic reforms.  Given that I’m a utilitarian, why do I favor Germany’s “tough love” approach over the soft love (or at least less tough love) approach of the IMF?

First let’s consider the “austerity” question.  In the Keynesian model, austerity may be a foolish policy during a temporary recession, or even a fairly long depression. But in the very long run, countries face hard budget constraints.  And by any stretch of the imagination the period from 2022 to 2060 must be viewed as “the very long run.”  It’s impossible to justify large and growing budget deficits during that 38-year period on the basis of “fiscal stimulus”.  That’s the road to bankruptcy.

It’s not easy to find accurate data on government spending and taxes, but the OECD has a graph showing that Greece spends just under 50% of GDP.  The IMF is simply wrong when it claims Greece’s debt situation is unsustainable.  If Greece had a smaller government sector, say closer to the 36% of GDP in Australia, or the 23% of GDP in Taiwan, then it could easily handle the challenges out to 2060.

The counterargument is that those sorts of cuts are not politically realistic in Greece, and at the moment I’d have to agree.  Some would claim the Greeks have already suffered from severe austerity.  You might wonder how that can be, given that nearly 1/2 of Greek GDP goes into government spending.  The problem here is that as G has fallen sharply, so has GDP, leaving the G/GDP ratio little changed, even as the Greek people have seen slashes in important programs.  The deeper problem is that Greece does not produce like a developed country, but its citizens expect the level of services and pensions normally associated with a developed country.  That’s why there is so much hostility to Greece in the middle-income countries of Eastern Europe, where benefit levels are lower.  I can see both sides of the debate, but next I’d like to explain why I think the German approach is the best option.

Greece faces two options.  One is to become a sort of ward of the EU, kept afloat by endless subsides, with a loss of sovereignty.  Here a model might be Puerto Rico, or the US possessions of the South Pacific, or perhaps the Native American reservations within the US.  These regions consume more than they produce, with the help of transfers from Washington.

But there is another model.  When I was young, Ireland was quite poor.  Articles were written explaining how the Irish poverty reflected some sort of flaw in the Irish culture, or even a lack of intelligence.  But then Ireland adopted a neoliberal economic model, and it has now become one of the richest countries in the world (although that’s a bit overstated, as its GDP exceeds its GNP due to heavy multinational investment.)  Still it’s a successful economy.

When I researched neoliberalism back in 2008, I was puzzled by Greece’s relatively high GDP per capita, given that it had the least neoliberal model in the entire developed world.  Of course we all know what happened next, that flawed model finally caught up with the Greeks.  Greece tried to maintain developed country living standards with a third world-type economic structure, riddled with corruption and statism, by borrowing lots of money.

I sympathize with the Greek people, but the hard truth is that they continually elected the flawed and corrupt governments that brought Greece to its current situation.  The Germans are right; Greeks need to tighten their belts and adopt neoliberal economic reforms.  This will allow them to boom like Ireland, and eventually get back to much higher living standards.

The Puerto Rican option might look tempting–have other countries pay for your consumption–but in the end the political winds in Europe will shift and Greece will be left to fend for itself.  Thus the reforms should start right now.  If they start running budget surpluses then the Greek debt is certainly serviceable in this new world of ultra-low interest rates.

Unfortunately, I don’t think they will follow my advice.  I predict that Greece will choose the Puerto Rican option.  The only question in my mind is whether the Northern Europeans will allow it.  Perhaps that’s one tiny silver lining from the new nationalism sweeping the world.

PS.  The more I find out about Trump, the less I like him.  He doesn’t even know how to do populism right:

Republicans and Democrats in Congress and in state legislatures have recently pushed legislation to rein in the long-standing practice of police seizing the cash and property of suspects who haven’t been convicted. . . .

Likening such efforts to the Iran nuclear deal he has often lambasted, Trump said no one understands the phenomenon.

He said Congress would be “beat up” badly by the voters if it stood in the way of police efforts to conduct civil asset forfeiture.

A 2014 Washington Post investigation found that police had taken billions of dollars in cash from motorists without search warrants, and without charging them with a crime.

If you read libertarian media you frequently come across almost unbelievable abuses in this areas, things that you’d expect from law enforcement in Nigeria, not America.  And Trump opposes any reforms.  Sad!

He’s just an appalling human being, in every possible way.  Fortunately he’s President of the US rather than the Philippines.  The courts will at least somewhat limit the damage over here.

Although I don’t agree with Mr Modi’s political views, I had hoped that he might reform India’s economy.  Unfortunately, right wing nationalists almost never opt for neoliberal policy reforms, it’s just not in their nature.

Today, the print addition of The Economist came out with an editorial asking the Modi government to reappoint Raghuram Rajan as head of the RBI.  Unfortunately, the government decided to go in a different direction, despite Rajan recently being named central banker of the year.  He brought Indian inflation down to more modest levels, without damaging India’s growth (which was 7.9% in the most recent quarter).  Rajan was also a powerful voice for economic reform, which may have been the problem.  The Economist editorial hinted at the opposition he faced:

Various Rajan devoted pages on Facebook have a combined fandom of over 250,000 people. Janet Yellen and Mario Draghi, his all-powerful counterparts in America and Europe respectively, cannot muster 10,000 thumbs-up between them.

Such adulation makes many suspicious. Mr Rajan has come under sometimes ugly attack from within Mr Modi’s BJP party. One member of parliament has described him as “mentally not fully Indian” on account of his international career.

I guess someone who is not satisfied with the Indian subcontinent being mired in poverty is not truly “Indian”.

An article in Quartz by Harish Menon listed some tweets lamenting the government’s decision:

Lesson for right wingers—don’t make a pact with the devil.  If a politician is bigoted against unpopular groups like Muslims, don’t believe his promises to make the country great.  The same (non-utilitarian) mentality that leads to bigotry, also leads to the path of crony capitalism, not utilitarian neoliberalism.

A sad day for India.

Back when I was young, America was an optimistic country that grew rapidly. Before NIMBYism got out of control, builders could build vast new housing developments, and the government would supply brand new expressways. Housing was cheap, and the workforce grew fairly briskly.

That America is mostly gone, except in Texas.  Many liberals thought Texas would have a recession when oil prices collapsed last year.  After all, back around 1986 Texas had a fairly steep recession, after a similar collapse in oil prices.  But not this time; indeed unemployment just fell to 4.4% in February, which is only slightly above the all time low of 4.0%, which occurred during the boom year of 2000.  Nor can this be attributed to people leaving the state; Texas continues to lead the US in population growth (total), and indeed growth actually picked up in the most recent 12 month period.

Of course Texas economic growth has slowed sharply due to the dramatic downturn in the fracking industry, but just look at how different the unemployment picture is compared to 1986:

I’d love to hear some thoughts as to why.  I can think of three possible reasons:

1.  In 1986 Texas was also suffering from the hangover effects of the S&L fiasco, but this time its banking system is in better shape.

2.  Oil is now a smaller share of the Texas economy (but that can’t explain the entire difference).

3.  The explanation I like most is that in 1986 the rest of the country was still doing sort of OK, so the the attraction of moving to Texas was less obvious than today.  Now the rest of the US is stuck in The Great Stagnation, which makes Texas look good by comparison:

Liberal Governors, tired of looking bad next to Texas, may have hoped to catch a break as the full impact of cheap oil hit the Lone Star State in 2015. And Texas is creating jobs more slowly this year””1.1% growth through May versus 3.6% in the same period last year. Lower-paying positions in hospitality have substituted for higher-paying energy jobs.

But the overall economic resilience is a far cry from the Texas recessions that followed previous oil busts. Unemployment in the state, 4.3% in May [2015], was still well below the national average of 5.5% that month.

Some credit goes to the foresight of energy companies that made themselves less vulnerable with better balance sheets. In a report specifically focused on the energy capital of Houston, the Dallas Fed notes recent improvement in job growth and says that “refining, petrochemicals and service industries are managing to offset oil-producer woes.” Statewide, education and health services employment has also been strong.

Meanwhile in Austin, which has little exposure to the energy industry, business other than government is booming. May job growth surged at an annual rate of 6.6%, including “a significant increase in high-paying scientific and technical services jobs.” Texas is now America’s top technology exporter, surpassing long-time leader California.

Notice that the boom in Austin is helping to offset a slowdown in places like Houston, so that overall job growth continues to be positive.  Back in 1986, Austin was not yet an important tech center.

Here, as in so many other recent cases, the pragmatic progressivism of Matt Yglesias (a Texas bull) and proved far more accurate that the ideological progressivism of Paul Krugman (a Texas bear).  Progressives might not like the small government model of Texas, but wishful thinking won’t make the Texas miracle go away.

I am seeing more and more articles, even at respectable outlets such as the Economist and the Financial Times, suggesting that the rise of right-wing and left-wing populism shows that something is wrong with the neoliberal model. Nothing could be further from the truth. The past two decades have been by far the best two decades in human history, and that’s what really matters.

Naysayers will sometimes acknowledge that hundreds of millions of people have recently risen out of poverty, but then claim that living standards have stagnated in America. That’s also nonsense, as I explained in this post. The next fallback position is that while real incomes in America have risen, the gains of gone to corporations, not workers. That’s also nonsense, as I explained in this post. The share of national income going to workers today is the same as it was 50 years ago, the supposed heyday of the working class.

The next fallback position is that while wages have done fine, even in real terms, wage income is becoming less equal. Bingo! Finally we get to an accurate statement. Fifty years ago, blue-collar workers at General Motors often made more than college professors. People with short attention spans sometimes act like this period was “normal”, ignoring 10,000 years of human history. They seem to suggest that our most pressing problem is that young men who don’t study in school and just shoot rubber bands across classroom should be able to earn an income that (in relative terms) was never possible in any period of world history before the 1950s and has never been possible in any period of world history after the 1970s. It reminds me of when farmers used to set the “parity” of farm prices with other goods prices based on the relatively high levels of 1909-14, treating that ratio as normal for purposes of farm subsidies.

Don’t get me wrong;  I have nothing against blue-collar workers. I’m relatively intellectual, and even I found the public schools to be mind-numbingly boring. I could hardly stay awake. I can’t even imagine how students less interested in ideas than I am could’ve gotten through the day. Nor am I one of those conservatives that will trash low-income whites for their lifestyle choices. As far as blue-collar workers are concerned, I wish them well. But I wish everyone well (except Trump), and the unfortunate truth is that the set of economic policies that is best for the world right now is probably not optimal for a subset of American blue-collar workers.

When I point out that the most important factor in trade policy is the impact on the poor in developing countries, some of my commenters tell me that the US shouldn’t have to import from China or India, they have lots of other countries to sell to. As Marie Antoinette might’ve said “let them sell to Canada.” That’s right, progressives ease their conscience by claiming that other developed countries won’t follow the same evil trade policies that progressives like Sanders want the US to follow, so things won’t actually be that bad for poor people in Bangladesh.  More often, they entirely ignore the issue.

I know that progressives like to think of themselves as the good guys, but the honest truth is that on trade they are increasingly becoming the evil ones, right along with Trump.

And here’s what else people don’t get. Not all the problems in the world are caused by neoliberal economic theories, for the simple reason that not all economic policies reflect neoliberal economic theories. Even if everything people say about inequality quality is true, there’s nothing wrong with the neoliberal model, which allows for the EITC, progressive consumption taxes, and sensible reforms of intellectual property rights, occupational licensing, and zoning laws.

I can’t help it if Democratic politicians oppose reforms of intellectual property rights. I can’t help it if progressives that once favored progressive consumption taxes now oppose progressive consumption taxes. I can’t help it if Democrats voted to repeal the luxury tax on yachts soon after having enacted a luxury tax on yachts. I can’t help it if progressives suddenly feel that a $15 an hour minimum wage is not a loony idea.

The simple truth is that neoliberal economic policies work, as we’ve seen in Denmark and Switzerland and Singapore, and socialism doesn’t work, as we’ve seen in Venezuela. So I’m asking all those wavering neoliberals in the respectable press (Thatcher called them “wets“) to stop your handwringing and get out there and boldly defend the neoliberal model. It’s not just the best model; in the long run it’s the only model that really works.

PS.  And don’t anyone insult my intelligence by telling me that Sanders favors the Danish model.

PPS.  And don’t tell me the GOP is just as bad—I know that.  But right now they aren’t the biggest critics of neoliberalism (except for Trump, obviously).

PPPS.  The Huffington Post thinks Kasich will be the nominee.  In other words, they think the GOP is a non-insane political party.  Meanwhile the betting markets currently assign a 5.3% probability to the GOP being a non-insane political party.  (BTW, I don’t like Kasich; I want Ryan.)

Meanwhile, Drudge has linked to a copy of next year’s Boston Globe:

Remember the Sports Illustrated jinx?  Athletes that appeared on the cover of Sports Illustrated often saw their performance drop off sharply.  I wonder if the same applies to Paul Krugman?  Here’s a Krugman post from 2013, trashing the Irish economic model:

The one sense in which Ireland has made some progress is that it has somewhat reassured bond investors that its population will continue to sullenly acquiesce in austerity; as a result, Irish 10-year rates, while still at a large premium, are now 60-80 basis points below those of Italy and Spain.

But the repeated invocation of Ireland as a role model has gotten to be a sick joke.

I’m not sure the Irish feel “sullen” about the 9.2% RGDP growth announced last week:

Notice that Ireland’s dramatic turnaround began almost immediately after Krugman’s August 2013 post.  The post was entitled:

Ireland Is The Success Story Of The Future, And Always Will Be

So what type of economic model does Krugman like?

Just to be clear, I think Brazil is going pretty well, and has had good leadership. But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.

I first wrote this post on the day when Lula was indicted for corruption, and his successor is now threatened with impeachment for the same.  In fairness, I would not expect Krugman to be aware of the political intricacies of Brazil.  I’m more interested in his views of economic policy.  So how has Brazil’s economy done since the May 2012 post, under that “good leadership”?

Yikes, that’s almost the mirror image of Ireland.  While Ireland is already richer than Germany (In GDP/person, perhaps not GNP), and growing at a much faster rate, Brazil is now poorer than China, and declining as fast as China is growing.

Argentina also slowed sharply after Krugman’s post, indeed the slowdown was already underway in 2013, but he relied on the 2012 data, when growth was still strong.  Fortunately they have a new government, which is beginning to institute some reforms.

PS.  Another irony; didn’t the “country of the future” joke that Krugman applied to Ireland, originally apply to Brazil?