Bad luck and bad decisions

I hate to engage in “blaming the victim.”   But as a right winger it’s my duty, isn’t it?

Imagine a captain set sail across the Atlantic with twice the maximum recommended cargo.  Barrels of flour are stacked high on the deck, causing the ship to ride dangerous low in the water.

Halfway across the Atlantic he has second thoughts, and begins gradually throwing some barrels overboard, to make the ship safer.  When he reaches the point where his cargo is 75% above the recommended limit, he runs into a once in 100 year hurricane.  The ship sinks.

Was it the captain’s fault?  After all, right before the hurricane he was making things a bit safer.  Obviously it was.  Sure he had some bad luck, but the bottom line it is that he never should have set sail with such a dangerous cargo.  Indeed this is so obvious that I can’t even imagine anyone disputing the point.

Now suppose Italy joins the euro with a national debt at 120% of GDP, twice the legal limit.  Over the next few years they gradually reduce it to 105% of GDP.  Then they have the bad luck of running into a once in 100 year sovereign debt crisis, triggered by even greater irresponsibility in their close neighbor Greece.  Are Italian policymakers at fault?  Paul Krugman says no:

Before the crisis Spain had low and declining debt. Italy had high debt inherited from the past, but it was steadily working that debt down relative to GDP. Neither country was being profligate “” that’s just not what happened. Since the crisis debt has been rising relative to GDP, but that’s what happens when you have an economic crisis.

Krugman’s looking at rates of change when he should be looking at levels.  Italy is in trouble because of excessive debts.  It’s also true that Italy’s had lots of bad luck; it really is an unusually financial storm and even safer ships like Spain are struggling.  But consider the following two points:

1.  Greece, Italy, Portugal, and Ireland all made very poor fiscal policy decisions.  Ireland is something of a special cases, as it’s mistake was bailing out bank creditors.  (A view Krugman shares.)

2.  So what about Spain?  Spain is suffering for a very simple reason—22% unemployment.  That sort of labor market failure doesn’t just happen.  About 10 or 15 years back Spain had an extended period of 20% unemployment.  They have extremely rigid labor market policies, and are being punished by the bond market for that policy mistake.

The other countries are just being tossed around a bit by the financial storm; S.S. Finland is in no real danger unless S.S. Greece smashes into the side of their ship.

Enough blaming the victims.  Now let’s start blaming some villains.  If the ECB keeps NGDP growing at 4% after 2008, it’s likely that Greece would be the only country in crisis right now.  The others would certainly still have structural issues worth addressing, but nowhere near as severe as the problems they current face.

But hurricanes happen, and so does mind-bogglingly bad monetary policy.  Countries need to get their finances as ship-shape as Australia, Singapore, or the Nordic countries, so that they are ready for the next storm, which might it be financial, demographic, or TGS.  I predict the 21st century will eventually be called the “black swan century.”

Update: Christian Odendahl of The Economist makes some related arguments.



34 Responses to “Bad luck and bad decisions”

  1. Gravatar of Lars Christensen Lars Christensen
    3. December 2011 at 08:27

    Scott, I agree…interestingly enough one of the architects behind the euro Jacques Delors in an interview with the Daily Telegraph today said that “the Euro was doomed from start”

    See here:

  2. Gravatar of Bob Murphy Bob Murphy
    3. December 2011 at 08:29

    Great post Scott; I was going to do something similar had The Man not taken down my own blog.

    But David Glasner is right: You’re being too much of a softie. Those charts Krugman put up show the debt loads of Spain and Italy zooming up BEFORE the euro crisis.

    So I humbly recommend that you change your analogy. The ship captain starts throwing cargo overboard, but then there is an outbreak of scurvy on board, so in the middle of the ocean he links up with a medical ship and takes on a bunch of fruits and medicine. He ends up with more cargo than even when he initially left port.

    Then, the actual cause of the hurricane is that Poseidon gets really angry at a nearby ship, that had even more cargo than the captain you’re talking about.

    Now in this revised scenario, would it be correct to say that “taking on too much cargo” had nothing to do with both of these ships sinking? I think that is more analogous to Krugman’s tour-de-force.

  3. Gravatar of Lars Christensen Lars Christensen
    3. December 2011 at 08:48

    Bob, what the h… happened to Free Advice??

  4. Gravatar of Lars Christensen Lars Christensen
    3. December 2011 at 08:50

    …but anyway Bob, if you want to write a blog post on exactly that topic I will be happy to offer you to write it as a guest blog on my blog…

  5. Gravatar of Bob Murphy Bob Murphy
    3. December 2011 at 09:08

    Lars, I don’t know what happened. A few weeks ago they started sending me notices that contradicted each other, about why I was violating their terms of service. I tried talking to their customer service people, and the only information they had was to read the emails I was getting from some other department in their company.

    At one point a guy told me I should go through all of the comments on my blog and delete anything offensive, since that might be what was causing the suspension. I pointed out that this would take me a good 4 days of non-stop work, so maybe they could give me a hint and tell me, say, the month in which the offensive comment occurred? He said no, he didn’t know.

    Anyway, the moral is: Don’t ever sign up with FatCow as your blog host.

  6. Gravatar of gwern gwern
    3. December 2011 at 09:12

    As a liberal, it is my bounden duty to excuse victims. So.

    Let’s imagine another analogy: the crew of this ship, out of endless respect for their democratic gods, have long been accustomed to voting on a new captain every week. Long ago at port, for 2 or 3 weeks ago, they voted in a libertine after an extremely trying voyage racked with storms and mutineers in which they nearly went down, and that is how they wound up setting off with their excess cargo. As these things go, the captaincy changed hands quite a few times, and the more recent ones realized to their dismay that this excess cargo really needs to be dealt with. They began to do so quite well with the support of the crew, obviously, but then *another* huge storm hit! Is that the (current) captain’s fault?

  7. Gravatar of Lars Christensen Lars Christensen
    3. December 2011 at 09:14

    Bob. thats sounds weird, but anyway my offer stands if you want to do a post on how you see the euro crisis then my blog open for a guest post from you (we might even agree…)

  8. Gravatar of Andy Harless Andy Harless
    3. December 2011 at 09:35

    Italy isn’t a single ship with a single captain. To make your analogy work, the captain has to be replaced repeatedly in mid-ocean. When a new captain is appointed, is he to blame if he does not immediately jettison all the excess cargo? Perhaps. But since Italy doesn’t have an independent monetary policy, its fiscal policy matters for output. A fiscal tightening severe enough to dramatically reduce the debt to GDP ratio in a short time would have had disastrous consequences. Ex post, knowing that the crisis would happen, it surely would have been better for Italy to have tightened more aggressively than it did prior to the crisis. But ex ante Italy’s pre-crisis leaders were acting with an appropriate degree of fiscal rectitude. I don’t see how one can reasonably blame them for Italy’s current problems. You can blame the abstract “Italy” if you like, but if we’re going to blame Italy for what happened prior to the mid-90’s, why not go all the way and blame Emperor Nero?

  9. Gravatar of B B
    3. December 2011 at 10:01

    As the owner of the cargo I wouldn’t let my barrels of flour be stacked that high and sent across the ocean. I’d take one look at that idiot captain and sell my stake in his cargo. Where were the flour vigilantes?

  10. Gravatar of david david
    3. December 2011 at 10:21

    Scott, what do you think determines the solvency constraint % of GDP anyway?

  11. Gravatar of David Pearson David Pearson
    3. December 2011 at 10:39

    Those ships carry very large containers known as European shadow banks. The captain didn’t pay much mind to those containers because the were supposed to be securely latched onto the deck. Problem was, all the containers carried the same stuff, and if that stuff shifted, they would risk tipping over together. Maybe the captain shouldn’t have stacked them so high, but he thought, “the stuff in there doesn’t weigh that much. I would if it gets wet, but that will never happen.” Earlier in the voyage, right around 2008, the containers started taking on some water, but he thought, “aww, I’ll have to turn back to port to really air them out, so instead I’ll just ignore it and they’ll dry out soon.” He knew some containers didn’t dry out, but he thought, “they won’t leak into the other ones, so no problem.”

    Turns out all the stuff in the containers was soaked. A moderately large wave hit the ship, and the stuff shifted as it rocked. The containers began to tip over, and the ship listed terribly. The captain and crew ran around saying, “if only we hadn’t allowed that small wage to hit us portside…”

  12. Gravatar of David Pearson David Pearson
    3. December 2011 at 10:44

    I forgot to mention one thing above. The bearded Lord of the Admiralty, and his revered predecessor, promised the captain that he would be facing calm sees on his voyage, and that if anything went wrong he would cover any losses. That was one of the big reasons he allowed those containers to be stacked so high.

  13. Gravatar of Morgan Warstler Morgan Warstler
    3. December 2011 at 10:46

    It isn’t the captain, it is the CARGOs fault.

    The cargo are real people who got more than they put in and now they have to get less then they put in, and that’s that.

    Less for Italians, less for Greeks, etc.

    less nigh end medicine, less high end food, less high end clothes, property worth less.

    In real terms they get to consume less.

    And since that happens whether they stay of go, they will stay.

    The whole world should BOO the public sector of these countries, boo so loudly they feel shame.

  14. Gravatar of Jason Jason
    3. December 2011 at 11:04

    Since one analogy seems to invite another, I’ll go ahead and throw one in too:

    This Italian ship of state was allowed to join a shipping consortium when it was overloaded above that shipping consortium’s cargo guidelines with the promise to bring the load within guidelines at a steady rate. They linked themselves with a common scrip good at the company store, but no common insurance. Then a hurricane hit and the Italian ship sinks (after the Greek and Irish ships among others) causing everyone to lose confidence in the tabs they’ve racked up at the company store. Now the scrip issuers want to force these shipping companies to pay off these tabs denominated in that scrip with scrip they don’t have all the while refusing to print more.

    There are really only two solutions: kick these shipping companies out of the consortium or issue them scrip to help them start paying down their scrip-denominated tabs.

  15. Gravatar of ssumner ssumner
    3. December 2011 at 11:19

    Lars, I agree.

    Bob, Yes, but in fairness to Krugman the increase was partly caused by the severity of the recession. Even in well run countries the debt ratio tends to rise during severe recessions.

    BTW, I plan to stop bending over backwards and giving my opponents the benefit of the doubt . . . in January.

    Thanks for that warning on offensive comments, I need to watch Morgan even more closely.

    gwern, I agree, and I probably also agree as to which captain was at fault. Mine was a general comment about the Italian policymaking process over the years, not a blanket condemnation of everyone involved.

    Andy, As I said to gwern, I wasn’t blaming current policymakers, I was blaming Italian policy. It joined the euro with vastly excessive debt. That’s a huge policy error. As far as I know the current government is doing a great job, given the mess they inherited. I wasn’t blaming the current government, but rather the governments that overloaded the ship and the governments that drove the unstable ship into the storm. Those were two distinct errors, which occurred in recent decades, not back when Nero was Emperor.

    Come to think of it, Berlusconi was a sort of Nero, wasn’t he? And the Italian public kept re-electing him. So maybe the Italian public is at fault.

    BTW, I also think the American public is partly to blame for electing the bozos who have produced America’s economic mess.

    B, Good point, I guess they hadn’t read “The Black Swan.”

    david, It depends on many things. Growth rates, having your own currency, cultural differences toward default, etc.

    All those were arguably negatives for Italy.

    David Pearson, Good point about the banks. But that’s more a problem for Ireland than Italy, unless I’m mistaken. Has the Italian government done expensive bank bailouts?

    Morgan, You sound like you are running for President . . . of Germany.

    But I do agree that voters bear part of the blame.

  16. Gravatar of ssumner ssumner
    3. December 2011 at 11:20

    Jason, Or have the ECB make the hurricane less severe.

  17. Gravatar of David Pearson David Pearson
    3. December 2011 at 12:11

    Most European countries face the prospect of having to bail out their banks. The problem faced by the likes of France, Italy, Belgium and Austria is that their banks are so big that bailing them out would lead to debt downgrades and exacerbate the fiscal crisis.

    The banking crisis in Europe is the more immediate one for the global economy. These banks are attempting to delever rather than raise expensive capital. As they do so, financial conditions will tighten literally across the globe (these banks are enormous). As anyone involved with Latin American debt understands, you can have private delevering and fiscal austerity, but only if you can maxi-devalue to tap external demand.

    A couple points more of NGDP growth are not enough to keep those containers from tipping over.

  18. Gravatar of StatsGuy StatsGuy
    3. December 2011 at 13:48

    @ Bob Murphy

    “Those charts Krugman put up show the debt loads of Spain and Italy zooming up BEFORE the euro crisis.”

    I believe that was Krugman’s point… And, to some degree, Scott’s. Had the ECB maintained the proper trajectory, he would argue, debts vs. gdp would be shrinking or stable. The question is whether the 2000-2007 trend was real… or was generated by private debt expansion to support illusory investment.

  19. Gravatar of OGT OGT
    3. December 2011 at 13:53

    Other people made thr point I was going to make about the “ship captain,” Italian debt has actually come down, slowly, in the Burlesconi era. It ran up in the 80’s and early 90’s when Italian governments changed every 18 months.

    From an economic standpoint the point of victim blaming should be avoiding moral hazard, otherwise leave it the preachers. It is not clear how much moral hazard is involved in Italy’s case. Everyone agrees that Greece is a different matter, but I don’t think the law of the sea is to let sailors on a poorly captained ship drown. It is the Captain and chief officers who lose their commission if found at fault.

    Of course, much of the cargo is owned by the German and French shipping companies. Unless one argues that they did not know how much cargo was being put on the ship (plausible in Greece’s case), they are as responsible as the captain. So in order to teach them to avoid moral hazard, they, perhaps, shouldn’t be made whole if the ship goes down, unless they CDS insurance by an actually solvent insurer.

    OK, have I tortured your metaphor enough?

  20. Gravatar of John John
    3. December 2011 at 14:25

    I think a lot of people are missing the beauty of a country not having the ability to issue their currency; it forces them to give their citizens more economic freedom. The printing press pays for the welfare/warfare state. Without the ability to issue currency governments can’t spend as much which means they have to allow the private sector to thrive if they want to be successful.

  21. Gravatar of W. Peden W. Peden
    3. December 2011 at 15:44


    That is actually one of the right-wing arguments for NGDP targeting: in a country with successful NGDP targeting, Ricardian equivalence is indisputable. Any increase in G has to come from I, C or X, and the consequences of such a redistribution are transparent to all; “crowding out” would always and straightforwardly apply.

  22. Gravatar of dwb dwb
    3. December 2011 at 15:55

    krugman lauds Irving Fisher’s debt-deflation analysis. thats step 1. jeez… If he would only make the logical link between that and nominal income declines we would be almost there – instead of a grudging acceptance of “whatever works” to generate positive inflation (what I think his last position on the subject), he may come to the conclusion that nominal income targeting is superior… putting a floor under nominal income is superior to a small positive inflation rate to avoid deflation(since nominal income can still decline aka 2008 financial crisis)… but if he admits that , why complicate things – just adopt a nominal income target!

    if you give a mouse a cookie…

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    3. December 2011 at 16:11

    The Hawke Government (1983-1991) did broad economic reform, the Keating Government (1991-1996) reformed “super” (expanded private pension arrangements) and some labour market reform, the Howard Government (1996-2007) did more labour market reform, tax reform and massively retired public debt; the RBA brought in explicit (inflation-over-business cycle) targeting (1993). Our political class Downunder has done so much better than most other folks’.

    The tyranny of distance and the long term decline in our terms of trade concentrated minds. Too much of the EU political classes seemed to have think the EU, or the euro, or both, were magic talismans that would protect them from Bad Things Happening.

    Of course, folk such as Krugman banging on about how worrying about debt was way over-rated did not help. (Taking reassurance by comparisons with very high post WWII debt was not appropriate–there is a difference from debt generated by a major emergency and debt being structurally generated; there is also a vast difference between positive baby-boom demographics and “easy” technological growth–catching up with the US–compared to adverse fertility-crash demographics and more restrained technological growth–more countries near the technological edge.)

    Of course, Australia had very bad 1890s and 1930s depressions in large part due to high public debt levels, so economic history encouraged scepticism about high structural debt levels.

  24. Gravatar of mbk mbk
    3. December 2011 at 19:10


    I’ll make the point once more that I made a few days ago when I gave the link on the Eurostat data.
    That would be similar to Krugman’s IMF data but for all European countries and going back before the Euro introduction. The big picture goes much beyond what Krugman says. Not only did debt/GDP ratios decline for the vast majority of EU countries, in many cases drastically (Belgium: 130% -> 85% in 10 years). They declined much before the Euro, about the mid 90’s.

    In the long run this is to be understood as a race against time to get European economies in order after the 70’s disasters. The EMU, then later the prospect of forming the Euro, and for many countries the simple prospect of joining the EU to begin with, served as incentives, the necessary push, to improve their finances. Countries were “let in” if they showed sufficient consistent improvement. This was a political decision, not an economic one. Just as West Germany accepted an “uneconomic” conversion of Ostmarks to Westmarks as a political glue for the reunification, countries that hadn’t reached safe debt levels yet were accepted into the Euro because they had made what was deemed sufficient progress. Everyone frowned on Greek accounting even 10 years ago. But it was deemed politically necessary to let Greece join.

    And the growth and stability pact in this context, was working too – not as a reality that was already achieved, but as a strong obligation and goal.

    Politics, and indeed entrepreneurship too, is about creating a reality through incentives. The Euro always was as much an incentive to get economies in order as it was, let’s not forget that either, a way to make the EMU more stable, which it wasn’t. The Euro is a classical example of creating facts on the ground ex ante. Risky, perhaps, but dumb? No – a deliberately taken risk. Until now, most of the howling against the Euro comes from the UK, and for good reason – many in the UK never wanted stronger political integration to begin with. From continental Europe most noises until now are the opposite, any price was considered right to keep the Euro.

    Politics also depends on windows of opportunity. After the Soviet Union collapse, Kohl of Germany saw an opportunity for reunification. Lest something happened again in Russia, it had to be fast. The EU partners, especially France, agreed under the condition of further European integration and eventual monetary Union, to neutralize a now much bigger Germany. I well remember it being presented as that, even in Germany – the D-Mark had to go eventually, as the price for the reunification. Germany said yes, only one small detail please, let the ECB be modeled after the Bundesbank.

    So this is where we got to where we are. It’s just not that simple, that it’s all economics and by extension, economic blunders. Many actions now called “blunders” are just prices then seen as acceptable to pay, or risks acceptable to take. No one wants to let Germany loose from the Euro because no one wants to see them drifting away from he whole EU. The whole Euro was created in good part to keep Germany in the EU.

  25. Gravatar of ssumner ssumner
    3. December 2011 at 20:27

    David, There are two issues–will the banks fail, and will they damage economies if they do? NGDP targeting can address the second.

    OGT, All good points, but it doesn’t change my view that Italy behaved irresponsibly. They ran up the debt, and joined the euro with the debt.

    John, I’m missing that “beauty” right now.

    dwb, Good point.

    Lorenzo, I have a feeling the Europeans are learning a similar lesson about high debts, and things may change in the future. Remember how big forex reserves came into style in East Asia after the 1997 crisis?

    mbk, Lots of good points, but none of them really change my mind that Italy made huge policy errors. They made these errors in a complicated environment, and lots of other countries also made errors. That’s true. But still, the Italian debt was way too big. It’s nuts for a democratic country to run up a public debt of over 100% of GDP when they aren’t even at war. What were they thinking? And then join the euro with that debt?

  26. Gravatar of John John
    3. December 2011 at 23:37


    The beauty will hopefully come from the economic liberalization the PIIGS will have to do to stay in the Eurozone. Of course the idea of embracing free markets seems as odious to most people as clubbing baby seals.

  27. Gravatar of mbk mbk
    4. December 2011 at 01:42


    My point was that the Euro was a carrot (as realized at first) and potential stick (as realized now), but in any case, a tool to force economic reforms and closer European unity, and not the result of these reforms. So the whole point of the Euro was in part to force countries with unacceptable deficits to reduce them. And most relevant countries were indeed well on their way there as the crisis struck. In this light, it was a carrot and a stick for Italy. If you had said Italy stays out for now, Italy could have procrastinated a lot longer. In addition, Italy was seen as a mandatory participant in the Euro because it was a founding member of the EU. Greece was seen as small enough to handle and another core country – the cultural origins of all of Europe.

    And, what John just said.

  28. Gravatar of Mike Sax Mike Sax
    4. December 2011 at 04:51

    “I hate to engage in “blaming the victim.” But as a right winger it’s my duty, isn’t it?”

    Scott, that is sentence of the year!

  29. Gravatar of Mike Sax Mike Sax
    4. December 2011 at 04:53

    Incidentally I’ve been playing around with your friends, the MMTers lately and they are s snarky bunch I must say

  30. Gravatar of RussFan RussFan
    4. December 2011 at 15:30

    The stories might be perfectly analogous if the original Captian fell overboard before the hurricane, and you were trying to decide whether to blame the new captain or not, regardless of which one it was that decided to throw the cargo overboard. What you are saying about Italy would be like blaming new graduates in the US for the problem with social security. Or, politcally speaking, like blaming a current President for the state of an economy at any point other than well into the future. The problem and leadership are not synchronus.

    Italy should absolutely have to deal with their problem. But it’s not like all their debt was amassed last year. It took time, and their debt decline is a sign they were trying to fix it. Give the credit or that at least.

  31. Gravatar of john haskell john haskell
    6. December 2011 at 06:50


    Debt/GDP 35%

    Can’t auction debt.


    The whole fleet (with the exception of Estonia, no rollover risk b/c debt/GDP 4%) is at risk of going down just like the Japanese at Truk.

  32. Gravatar of Becky Hargrove Becky Hargrove
    6. December 2011 at 07:26

    The whole playing field will become unrecognizable if there are not enough takers for these auctions.

  33. Gravatar of Charlie Charlie
    8. December 2011 at 11:23

    I’m not sure you really addressed PK’s point. He’s argued that the real problem is that they joined the European Union and gave up authority of their own currency. I guess in some sense, he is agreeing with you that it’s the captain’s fault. It’s just that it was the captain’s fault for setting sail on such a dangerous voyage. It should have taken much safer routes where it’s large cargo wasn’t so dangerous.

    He also totally agrees that the ECB is a villain.

    So which is the real problem your loading the cargo or PK’s setting sail (joining the euro)? I think even with much more manageable fiscal policies the EU would be in trouble. The AD in the PIIGS country would still be too low, prices would have to fall too far given the ECB’s policy decisions. Whereas, with the same fiscal policies, but not in a monetary union, I think the countries would be in a much better position.

  34. Gravatar of ssumner ssumner
    10. December 2011 at 06:39

    John and mbk, That’s a good argument, but I think they’d have to do those reforms anyway.

    Mike Sax, MMTers are snarky? Just because some sarcastic MMTers without any education in economics insist only they know the TRUTH, and that all Nobel Prize winning economists are idiots, doesn’t make them snarky, does it? Remember, “Banks never lend out reserves” (But what if you take out a loan and ask for the money in cash?)

    Russfan, You misunderstood my post, I blamed Italy, not the current leadership of Italy. If I blame Germany for WWII, that doesn’t mean I think it’s Angela Merkel’s fault.

    John, I agree, and that’s because people don’t even know if the euro will exist. But what caused this euro crisis? I say the PIGS plus the ECB.

    Becky, I agree.

    Charlie, I only address the Krugman “points” that I am interested in addressing. I certainly agree the euro was a huge mistake, but I disagree with his view that irresponsible Italian debt policies were not part of the problem.

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