Join the club

In late 2008 it was frustrating to hear all the triumphal statements from leftists about the failure of neoliberalism, the failure or of market fundamentalism, the failure of deregulation.  Of course the real problem was the tight money policy of the Fed, which caused NGDP to fall rapidly.

Now the progressives are getting a taste of their own medicine.  Just as the 2008 crash did look (at first glance) like a failure of capitalism, the 2011 euro collapse looks (at first glance) like a failure of the European big government welfare state model.  Here’s Paul Krugman fighting a losing battle:

What a tragedy. A rich, productive continent, which has produced arguably the most decent societies in human history, is tearing itself apart because its elite insisted on embarking on a dubious monetary project, and now can’t bring itself to take the steps necessary to give that project a chance of working.

He may be right about the virtues of Europe.  But take it from me, trying to sell that argument at a time like this is like trying to hold back the tide.

In reality, the US banking model was flawed.  It made no sense to deregulate the asset side of bank balance sheets as we were backstopping the liability side.  And in reality, the Greek and Italian and Irish governments made a lot of poor choices.  But capitalism works pretty well, as does the Northern European welfare state.  In both cases tight money made some very real problems seem much worse than they actually were.

The majority view will always be the common sense view.  When that view is wrong, there’s not much you can do except keep plugging away, and hopefully convince historians to re-write the history books a couple decades later (as Friedman and Schwartz overturned the original view of the Great Depression)  That original view was that the Great Depression represented a failure of capitalism.  Now it’s understood to be a failure of monetary policy.

Plus ca change . . .



39 Responses to “Join the club”

  1. Gravatar of Ram Ram
    9. November 2011 at 19:42

    Forget about nominal GDP targeting for a second. Does every mainstream observer of the situation in the Eurozone agree that if the ECB announced tomorrow that it was targeting a low interest rate on Italian government bonds, while the Italian government agreed to fast-track a range of pro-growth reforms, that the situation would almost immediately become dramatically less severe? What about if they did the same for Greece? And so on (lather, rinse, repeat).

    We don’t even need to agree on ideal monetary policy regimes. By conventional reasoning, it is clear the ECB has the power to essentially end the Eurozone crisis overnight, and if they really insist on it, they could demand in exchange lots of structural reforms to avoid these problems down the line. So, everyone should be able to agree that the ECB is the problem. What’s the downside? Moderately high inflation? How can anyone think that’s worse than what is (or might soon be) happening?

    I have views on the European welfare states, and the European monetary union, but I feel like everyone who has any idea at all what central banks do should be able to agree that the ECB can turn a lot of unnecessary pain into a small amount of necessary pain by flipping a switch. I’d like to think this is true in the US too but I can see why intelligent observers might not realize money is tight here. In Europe it’s as plain as can be.

  2. Gravatar of John John
    9. November 2011 at 19:55

    I hate to be picky but it’s “plus ça change”… sorry it just sticks out to French-speakers!

  3. Gravatar of johnleemk johnleemk
    9. November 2011 at 20:01


    I shared your post on the paradox of French “socialism for me, capitalism for you” with my French housemate. He’s a quite well-educated professional (has a Masters from UChicago, actually) and holds dual American and French citizenship, so he may not be very typical. His response (I paraphrase):

    1. I don’t understand his comment about healthcare, many British people visit France to be treated because they can’t afford private British healthcare (I think he might not know the NHS is single-payer, because he added that most healthcare in France only costs a 0 to 20% copay);

    2. Sarkozy championed the bailout and wants a Tobin tax, he isn’t advocating neoliberalism in the least.

    So this might go some ways to explaining the paradox you were wondering about.

  4. Gravatar of johnleemk johnleemk
    9. November 2011 at 20:04

    And these comments rather run counter to what one’d expect knowing my friend’s biases, because as far as I can tell he is mostly neoliberal (though of course he does not fully like the wild and woolly capitalism of the US), and has spent quite a bit of time ranting about Sarkozy’s support for a Tobin tax. He also hates the bailout and thinks France and Germany should just cut the PIGS loose.

  5. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. November 2011 at 20:05

    What folk call ‘neoliberalism’ was, in the Western world, all about saving the welfare state. This is particularly clear in the Antipodes, but hardly less so in Scandinavia; it is why centre-left governments were so often leaders, including railway and airline de-regulation starting in the US under the Carter Administration. (There was some likely cross-fertilisation there, as a lot of Australian Labor Party politicos are keen students of American politics and political history: they even have a society, the Chester A Arthur Society, on the grounds that if you knew who Chester A Arthur was you are the sort of American history geek who would fit right in.)

    As for fixing Eurozone issues: central bank as doomsday device, who would have thought that was possible! Oh, wait …

  6. Gravatar of John S. John S.
    9. November 2011 at 20:22

    I wish it were true that the Great Depression were now “understood to be a failure of monetary policy.” Sadly, I think that’s only true among economists. Everyone else still holds the “common sense view” that it was a failure of capitalism, only solved by FDR’s (fiscal and regulatory) interventions, or WWII.

  7. Gravatar of Edwin Herdman Edwin Herdman
    9. November 2011 at 21:10

    Paul Krugman is right about Europe.

    The basic problem, however, is that in this tightrope act the EU has been loading down the “stability” side and shortchanging the “democracy” (small-d) side of their balance weight.

    The EU project, seen this way, might be also temptingly categorized under the class of “projects to fight the last war,” in this case, literally; the “original” EU forerunner, the ECSC, was a stab at reconciliation between France and West Germany. The grand integration of the European nations didn’t necessarily mean, from the outset, adopting a common economic policy (and they have not) or even adopting a single currency – but it did mean trying to break down international boundaries and some sovereignty to help bring about European reconciliation.

    I would clearly not only be in over my head but also probably simply wrong if I attempted to then tie up the difference with a mention of the appeal of a common passport and a common currency, though indeed countries which kept their own currencies have fared better post-Communism.

    So I will resist such an attempt to be too sweeping.

    However, we can clearly see that the “little person” has been steaming for a long while about attempts to reduce their democratic input as bumps or inefficiencies on the road to prosperity. And it appears, at least from a distance, that the EU has attempted to paper that over – sometimes literally, as seen in the proliferation of EU bodies and agencies. The center of the EU is a hub for more reporters and more translators than Washington, D.C., by apparently a large margin.

    As the “original” round of the revolving series of financial and fiscal crises began in 2007, those of us studying the EU were already hearing about the description of the EU being “in crisis” over the throwing out of the proposed EU Constitution.

    Many observers likely have clucked and shaken their heads at the intermittent recalcitrance of various polities in demanding some say over their own situation, but it does appear that the “little people” had some common wisdom that the central planners lacked.

    However, I do bristle at any notion that Europe is tending Communist or worse – if anything, in the structure and focuses of the EU one can often find the same sort of fascination and obsession with the interests of the financial sector as in the U.S. The political rhetoric is quite different in Europe, but the ultimate result is often the same. Remember that everyone criticized the Greek PM George Papandreou for rocking the boat – really, for demanding that the steps to a solution be given some local legitimacy.

    He has gotten it, and hopefully the EU has gotten the message that at stake is not just the single currency, but also the unified institutions of the EU. While untangling the EU seems incredibly difficult at this point, it should be hoped that at the least observers will note that steps to reduce the flexibility of member nations should be avoided always, and this should be an organizing principle of the EU, to be balanced against collective prosperity and stability.

    It’s also quite likely that the Turks, who had spent humiliating decades attempting EU membership only to give it up in the mid-part of this last decade, are feeling a bit vindicated right now.

    @ Lorenzo:

    “What folk call ‘neoliberalism’ was, in the Western world, all about saving the welfare state.” If by “welfare” you mean the corporate kind – pushing all legitimate business responsibilities off into “externalities,” then maybe: In the United States, while the “liberal / conservative” dichotomy appears well-known, neoliberal still means liberalism in the classical context, i.e. freedom from regulations in this context. Think “libertarian.”

    Otherwise you provide an excellent response, as usual. I find the use of “liberal” and “conservative” rather too picky, but I believe it needs to be respected.

  8. Gravatar of Thomas Thomas
    9. November 2011 at 21:13

    I came to say what John has already said. I’ll add only that, everyone else includes those who read Krugman’s columns. What was most frustrating to me in 2008-2009 was not just that the current situation was misunderstood, but that the lessons of the Depression were unlearned. All of a sudden we were back to a stock market crash causing a depression, just like I’d learned in grade school.

  9. Gravatar of David Pearson David Pearson
    9. November 2011 at 22:07

    To summarize the view of various European interventionists:

    -The problem is the welfare state; the solution is for the central bank to finance the welfare state.

  10. Gravatar of John John
    10. November 2011 at 00:41

    Krugman is delusional about Europe. Their societies are horrible to immigrants, if they let them in at all. Plus it’s very difficult for young people to get a job. When I visited Spain I saw a whole generation of unemployed twentysomethings living at home. Stores closed from 2-4 for siestas. Usually time for some hungover loser to nap. These countries wanna live like us while working 25 hours a week and having the social safety net of Cuba. Guess what guys it doesn’t work. I take pleasure in watching these corrupt, lazy countries like Greece, Italy, and Spain go under. They’re finding out the hard way that you need to move towards markets to stay competitive.

  11. Gravatar of StatsGuy StatsGuy
    10. November 2011 at 04:55

    Ram, though I agree, I think it’s a mistake to assume the ECB has the same priorities as the rest of Europe, either in terms of monetary targets, OR in terms of tax regimes or social structure.


    “Krugman is delusional about Europe. Their societies are horrible to immigrants, if they let them in at all.”

    So is Hong Kong, Singapore, Japan, etc… Any society that offers significant rewards to membership must by definition limit the access to membership, or it is not tenuous. It’s interesting that most libertarians demand the right for corporations and groups to limit their own membership (lest they be destroyed), but are eager to restrict the ability of states to limit their membership. The duality of the position betrays a single-minded goal that lacks moral justification – that being, destroy states, which ultimately will destroy the meaning of private property except in so far as it relates to warlordism.

  12. Gravatar of StatsGuy StatsGuy
    10. November 2011 at 04:58

    _is_ tenuous

  13. Gravatar of dwb dwb
    10. November 2011 at 05:28

    I have a somewhat different take.

    “tight money” comprises both lending standards and monetary policy. The failure over the 2004-2007 period of regulators to see just how lax lending standards were is appalling (“liar loans” was coined during this period). It was compounded by the fact that 1)bank credit models are backward-looking and never saw a period of home price declines; and 2) intense industry pressure to keep-up-with-the-jones and collect fees because their peers were doing it. Ironically, it was private label stuff not the GSEs as they did not get in the game until way too late. The real estate market has been boom and bust for eons…the bust in real estate was inevitiable, and given the size of the housing market relative to the US, it was bound to be ugly.

    Yes, they compounded the error by failing to ease early, and failing to recogzine the magnitude of the problem. To be fair, commodities climbed very significantly in the first half of 2008.

    Now, the opposite is true. Lending standards in the mid-90s were “goldilocks” IMO, and we’ve swung way to the opposite end of the spectrum.

    Europe is a slightly different issue. Some European states are too big, to be sure, but the insistence on internal deflation rather than tolerance by Germany of slightly higher inflation; The lack of labor mobility; the refusal to allow the ECB to fulfill the lender of last resort; lack of fiscal union and lack of transfers/stabilizers from Germany and other states to subsidize unemployment in spain and states suffering under the recessionary weight. It’s not a size-of-state issue. In my mind I put the blame squarely on the Germans for their wild-eyed denial of economic experience over the last 200 years. wages are sticky! currency pegs and internal devaluation do not work (Argentina!). Structural reforms (while necessary) and the confidence fairy are not the issue. The UK, US, Japan… all have high debt ratios and low yields. Its purely a growth issue, the market does not believe Italy will grow its way out of debt.

    …because money is too tight and fiscal stimulus is out of the question!

  14. Gravatar of Gene Callahan Gene Callahan
    10. November 2011 at 05:58

    @John: “I take pleasure in watching these corrupt, lazy countries like Greece, Italy, and Spain go under.”
    The name for people who love watching others suffer is “sadist.”

  15. Gravatar of ssumner ssumner
    10. November 2011 at 06:19

    Ram, I would not go quite that far. I certainly favor a much more expansionary ECB policy, but doubt it would solve the debt crisis. Greece would still be unable to pay it’s debts. There is also the moral hazard problem. It might reduce the sense of urgency for Italy to do needed reforms.

    Again, I think an easier monetary policy would be desirable, but it wouldn’t end the crisis. (Just as easier money wouldn’t have solved the subprime mess.)

    Thanks John, No wonder I got a C in French! It’s still not right, (my keyboard lacks that special letter) but it’s now closer.

    Johnleemk, Sounds like he’s deep in denial. I love the statement about how the UK couldn’t have communist medicine, because their system doesn’t work very well.

    And how does the Tobin tax affect anything I wrote?

    Lorenzo, Good point.

    John S. You may be right, which would be pretty sad. But let’s face it, most people know very little about anything outside their personal lives.

    Edwin, Good point about the Turks.

    Thomas, I agree.

    David, That’s a good line, but there’s no way the ECB will ever finance the welfare state. Germany would leave the eurozone first.

    John, I agree that Krugman underestimates the problems with the European welfare state, although in fairness he favors the northern European model, which is less dysfunctional.

    However his reform ideas for the US do not move us closer to the northern European model, they move us closer to the southern European model

    Statsguy, Good point about Asia, but I think he also meant that immigrants aren’t handled well after they enter. Labor market regs make it hard for them to get jobs.

    dwb, That’s mostly my view as well, although I don’t see fiscal union as very practical, the countries are simply too different.

  16. Gravatar of johnleemk johnleemk
    10. November 2011 at 06:22


    Singapore is out of place on your list; I would go as far as to say that including it there is completely wrong. Singapore is NOTHING like Japan in terms of xenophobia or anti-immigration policy. Don’t know enough about Hong Kong to comment but I am also skeptical of bucketing it together with Japan.

  17. Gravatar of ssumner ssumner
    10. November 2011 at 06:23

    Gene, Good point. It’s a mistake to equate bad economic polices with bad people. I plan to move to California, I hope that won’t instantly make me a bad person deserving of fire and brimstone.

  18. Gravatar of Contemplationist Contemplationist
    10. November 2011 at 07:12


    One of the great unfolding tragedies is the undoing of California. I can’t begin to imagine how awesome California can be with decent policies – the California Democrats are determined to destroy the state, or so it appears.

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    10. November 2011 at 09:18

    ‘Ironically, it was private label stuff not the GSEs as they did not get in the game until way too late.’

    Don’t you Housing Cause Denialists ever give up? Without the GSE Act of 1992 (and the HUD Best Practices Initiative of 03, and the amendments to the CRA in 95) none of the toxic loans would have been made in the first place. Contrary to the delusions of Ritholtz and Krugman.

  20. Gravatar of John S. John S.
    10. November 2011 at 09:42

    Statsguy – You said, “It’s interesting that most libertarians demand the right for corporations and groups to limit their own membership (lest they be destroyed), but are eager to restrict the ability of states to limit their membership.”

    Uh, really? Libertarians support the rights of groups to limit their own membership. This does not mean that libertarians think that it’s a good idea for every group to restrict its own membership. For example, contrary to what you seem to believe, the libertarian party has not banned all new members to avoid its own “destruction.”

  21. Gravatar of Greg Ransom Greg Ransom
    10. November 2011 at 10:12

    This Johnnie One Note stuff is tiring, Scott.

    We have multiple causation here, and to pretend otherwise only weakens your explanatory efforts.

    “Of course the real problem was the tight money policy of the Fed, which caused NGDP to fall rapidly.”

  22. Gravatar of Turner Turner
    10. November 2011 at 10:26

    I guess the question is: is there any real world event that could cause right wing economists to abandon market fundamentalism, RET, EMH and their various corollaries?

    After 2008, we have found the answer: no. There is no hope for much of the modern right (who, in practice, are effectively the useful idiots of financial institutions). If any right wing person wants to disagree with me, please cite an event or piece of evidence that would make you change your mind about deregulation. I bet it’s pretty difficult.

  23. Gravatar of Doc Merlin Doc Merlin
    10. November 2011 at 11:05

    @David Pearson

    If they try that, then they are doomed. Using money printing to try to finance a welfare state has doomed every country thats tried it.

  24. Gravatar of Becky Hargrove Becky Hargrove
    10. November 2011 at 11:25

    Looks like Bernanke’s a little concerned about Europe, or at the very least, not sitting down:
    “Bernanke Takes Fed’s Message to Texas”
    Cue “Taking It To The Streets”. Where’s my walking shoes? (I only wish)

  25. Gravatar of John John
    10. November 2011 at 11:33


    It’s not libertarianism, it’s simple economics that says that capital and labor should be allowed to flow towards their most productive uses. With free mobility of capital and labor, global poverty would end quickly.

  26. Gravatar of Becky Hargrove Becky Hargrove
    10. November 2011 at 12:35

    Maybe, just maybe, Bernanke has been looking at the Republican presidential lineup and realizing no one there is really intent on any serious role for the Fed. In last night’s debate, the subject of Europe as well was far away from the candidate’s minds. So Bernanke could decide to play the cards he holds now even if they aren’t the ones he would have wanted; that could well mean that with the crisis in Europe, he may start stepping up to the plate. After all, he knows that Benjamin Strong died way too soon. Bernanke still has a chance to make a real difference.

  27. Gravatar of StatsGuy StatsGuy
    10. November 2011 at 13:42

    @John L

    Why is Singapore out of place? It’s not so easy…

  28. Gravatar of StatsGuy StatsGuy
    10. November 2011 at 13:44

    @ John S.

    “Libertarians support the rights of groups to limit their own membership.”

    Since most people agree that nations are by definition a “group”, then Libertarians should support the rights of nations to limit their own membership…

    The only thing that Libertarians should NOT support, is nations that _restrict people from leaving_. Hirschman covered this very well in his book on exit, voice, and loyalty many years ago. The right to exit is THE defining characteristic of a free society.

  29. Gravatar of John S. John S.
    10. November 2011 at 14:31

    Statsguy, talking about the “rights” of states is meaningless.

    If states are just groups on a larger scale, after all, then they must have the “right” to adopt any rules they want! They could, for example, adopt the death penalty for adultery, or ban art or films that portray the state unflatteringly–as long as everyone’s given the right to leave.

    But either way, I’d rather that the US didn’t adopt that particular set of policies. So I have to shrug when you point out that states have the “right” to limit their own memberships in order to argue that the US *should* limit its own membership.

  30. Gravatar of John John
    10. November 2011 at 17:57


    EMT and RatEx are not important to “market fundamentalism.” Guys like you are delusional. You probably blame the crash on deregulation despite a doubled SEC budget and thousands of pages of new regulation passed on financial markets with Sarb-Ox and the Patriot Act. You liberals have no economic reasoning or historical sense.

  31. Gravatar of ssumner ssumner
    10. November 2011 at 18:17

    Contemplationist, Yes, and I’m moving there soon.

    Patrick, Yes, I appreciate you pointing this out. I find the GSE-deniers extremely annoying. How else could the GSEs have lost so much money, if they weren’t enabling bad mortgages?

    Greg, Reread my post, I said the debt crisis had multiple causes, falling NGDP and bad lending decisions. I’d add bad banking regulation.

    It’s my opponents who are the Johnny One Notes, who deny the role of falling NGDP.

    Turner, I favor some government regulations, so I presume you aren’t asking me. I presume you also think it “obvious” that the euro crisis shows the folly of the European welfare state model?

    Becky, Let’s hope so.

    Statsguy, Singapore has just about the highest immigration rate in the world. And it’s extremely densely populated already. So it might be unwise to compare it to Japan.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. November 2011 at 22:05

    I never blamed the economic collapse on deregulation just as I don’t blame the current euro crisis on bloated welfare states. But I hate zombie myths and I always do my darndest, no matter how difficult it may be, to bust them.

    1) Krugman has a very good point, especially when one considers Ireland. Ireland social expenditures as a percent of GDP is the lowest in the OECD with the exception of Estonia and Slovakia. In addition it was following a full menu of neliberal policies including very low marginal corporate tax rates and consistent annual fiscal surpluses. And yet its current 10 year bond rate is over 8%, higher than any eurozone country with the exception of Greece and Portugal. Ireland’s biggest mistakes consist of joining a monetary union run by unrepentant inflationphobes and in socializing the massive losses of its banking sector.

    2) The implicit importance of blaming the housing bubble on the GREs and the CRA is that it was the housing bubble itself which caused the Great Recession. Anyone supporting that hypothesis is helping take the conduct of monetary policy off the hook for the blame it must truly solely bear.

    And blaming the housing bubble on the GREs and the CRA is silly for the following reasons:

    A) With respect to F&F:
    As of 2009 Q1 the entire federal government (including Fannie and Freddie) owned or guaranteed only 32 percent of seriously delinquent loans despite holding 67 percent of all mortgages. In contrast the private mortgage financing channel, which did not involve the federal government at all and was policed only minimally, generated only 13 percent of outstanding loans but was responsible for 42 percent of serious delinquencies. (Slide 13):

    B) With respect to the CRA:
    Only 11.7% of loans covered by the CRA awere identified as subprime and the total number of such loans was just over 367,000. This was only 5.9% of all subprime loans and only 1.3% of all mortgages originated between 2004 and 2006. Furthermore UNC Center for Community Capital research found the default rate for CRA loans was 70% less than for a subprime loans made to borrowers with similar risk characteristics and Federal Reserve Bank of San Francisco research found that loans made by a CRA-regulated lender in its assessment area were more than 60% less likely to be in foreclosure than loans made by an independent mortgage company to a comparable borrower.

    C) It’s also worth noting there was a contemporaneous bubble in commercial real estate that the CRA and F&F had nothing to do with. And despite the fact that CE mortgage debt is one third the size of residential mortgage debt the potential losses from delinquincies could turn out to be even larger.

    And did the CRA and the GSEs cause the many contemporaneous housing bubbles found worldwide? In particular the UK, Iceland, Ireland, Spain, and Denmark all suffered from contemporaneous credit crises but have no government institutions analogous to Fannie Mae, Freddie Mac, or Ginnie Mae, or policies analogous to the CRA.

    On the other hand Canada does have an institution very similar to Fannie/Freddie/Ginnie (the Canada Mortgage and Housing Corporation), antidiscrimination lending policies analogous to CRA, and high levels of government support in the mortgage markets. And yet Canada, unlike the United States and many other countries that experienced a recent housing bubble, did not have a major surge in unregulated lending and new product types, as private-label securitization remained negligible:

    The GRE’s current losses of some $200 odd billion pale in comparison to the well over one trillion in losses nationally, especially considering they hold about two thirds of all mortgages. And as Dean Baker and Barry Ritholtz have pointed out much of the losses they have suffered since passing into conservatorship are due to their acting as a backdoor bailout of the nation’s banks. And given that they now backing over 96% of all current mortgage issuance there wouldn’t even be a mortgage market right now if it were not for F&F.

    The bottom line is this is zombie myth pushed by those living in the Fox News echo chamber. They don’t realize there’s another world that doesn’t subscribe to these myths. And furthermore, anyone still pushing or supporting these myths is undermining the real culprit for the Great Recession: bad monetary policy.

  33. Gravatar of Edwin Herdman Edwin Herdman
    11. November 2011 at 00:14

    Mr. Sumner:

    Krugman very recently gave a good response to the “welfare state” criticism of Europe, I think. I have some more detailed observations about why I think it does not fit.

    I do not see any clear evidence that Europe and especially the Euro have much to do with supporting a welfare state, in terms of promoting deficit spending or failing to punish high levels of debt. If anything, at the moment it is exactly the opposite, and this is the game that has to be played to save the Euro.

    With more detail this time: To join the Euro, nations must: Not surpass certain levels of debt; not surpass certain levels of inflation; the long-term interest must not surpass a certain amount. On top of that, they must adhere to the exchange rate mechanism and not have devalued their currency.

    These fundamental design principles intended to promote market stability and competitiveness; they have nothing whatsoever to do with the welfare state, and indeed I think they make it harder for a welfare state to continue when one considers that the averages that must be met are influenced by Euro member nations that do not have high levels of government spending (although this depends from criteria to criteria, and indeed “slack” was built in to the criteria), and the 3% deficit to GDP spread and 60% debt to GDP spread make it harder to join the Euro with untamed debt and deficit spending tendencies.

    A prospective Euro zone member is restricted, if only in the joining year, to be “on a track” towards not having much bigger government spending programs than the other states. Currency devaluation is specifically denied to quickly get the house in order.

    While a state can always lie or do an about-face and turn from their acceptance of this criteria, the fact is that it was universally agreed that they should not, and so if anything this was a case limiting the welfare state. So even though the preceding arguments could be argued to be based on the universal inefficiency of Euro Zone members (specifically those which would provide immediate criteria for any prospective member, which are not necessarily the best members), the challenge still remains of demonstrating that there was not in fact universal belief of the soundness of the EU policies which limit a nation’s ability to intervene in its own economy.

    I don’t think that requiring ongoing adherence to the Euro Convergence Criteria (the name for the above economic criteria for accession) as a condition of continued EU or Euro membership is any solution to the mess, either; that would make it even harder to address problems that require stimulus or government spending.

    I find your point about NGDP interesting in a way beyond that you might have strictly intended – for Europe, the European Passport and free working conditions have created situations where one nation resents the freedom with its services of those who do not pay taxes there (see “healthcare tourism” in Spain a few years back; potentially billions of dollars in healthcare funding shortfalls were at stake).

    In some ways, this recent mess will certainly cause those nations that did base high levels of government spending on fraudulent accounting to be more wary in the future, and that can’t be a bad thing. I wouldn’t say that’s worth the pain, but the eternal deficit model has been proven dangerous at best if for no reason than it forestalls deficit spending in crises without upending everything. Those who say that continuous government spending to prevent slowdowns is desirable hold my attention at the moment – I’m currently persuaded that it’s just when debt puts them at a disadvantage in their ability to raise capital that is a problem – of course that’s not a minor problem!

  34. Gravatar of Floccina Floccina
    11. November 2011 at 07:49

    To democrats that say capitalism failed I would like to ask them to look a 20 dollar bill and note that it is ferderal reserve not sighed by secretary of the treasury. IMHO the monetary system should be robust to a collapse in real-estate or stock prices or any other set of assets. From my perspective the monetary system was taken over by government (foolishly) in the civil war period. That slowed the evolution of the monetary system. I think that the monetary system is not sufficiently capitalist (that is free and competitive). If it had been more free I bet that it would have evolved to a robust system were money was backed by bank assets and neither gold nor Government fiat. I think that would make a system that is robust to large bank failures and other disruptions.

    To make the system robust the failure of the weakest banks should strengthen the remaining banks, the opposite of what happens now.

    Finally to me to admit to the problem being monetary to to admit that it is a Government problem.

  35. Gravatar of Turner Turner
    11. November 2011 at 08:55


    I don’t – why would it? I do not see the causal link between welfare states and the current crisis as many countries were running surpluses or very low deficits prior to the GFC, with the exception of Greece. However, most of their problems stem from rampant tax avoidance rather than a welfare state per se.

    I *do* see the current EZ problem as one of collusion between politicians and financial interests, trying to create some sort of United States of Europe. I’m not really too bothered whether it fits onto the ‘markets’ or ‘governments’ side of the equation as they have effectively become one and the same.

  36. Gravatar of John John
    12. November 2011 at 02:01


    Reagan cuts the Federal Register in half in the early 80s and the US finally gets significant real GDP growth. There are lots of examples of deregulation working.

    I’ve never heard anyone present a real theoretical argument for why regulations need to exist and why they work. All I hear is people like you blaming everything on republicans and Glass-Steagal being repealed. You guys have no theory to back you up and the weakest circumstantial empirical evidence possible. It’s sad that in social sciences theories can’t be disproven with data, but I’d be happy to tear apart you reasoning any day.

    Why would regulators be able to invest and predict trends better than a hedge fund manager? They can’t. If they could they’d do it. Plus their incentives are all off in any case.

  37. Gravatar of ssumner ssumner
    12. November 2011 at 14:02

    Mark, Krugman may have a very good point for Ireland, but its case is totally unlike the other PIGS. Tyler Cowen is right, the Southern European version of the welfare state is highly flawed.

    I don’t care anything about when the GSEs bought this or that debt. Whenever I read one side, a week later I read the other side completely refute every argument. I don’t trust anyone. All I care about is how much taxpayer money is shoveled into bailouts. It’s a huge amount for the GSEs, and almost nothing for the big banks. And I don’t buy the backdoor bailout argument, I’ve never seen a good argument for that proposition.

    If the GSEs were used for backdoor bailouts, just another reason they should be abolished.

    You said;

    “It’s also worth noting there was a contemporaneous bubble in commercial real estate that the CRA and F&F had nothing to do with.”

    That’s not right. The CRE market was very healthy from 2006 to mid-2008 (when residential tanked), and only collapsed because NGDP collapsed.

    The bad losses in CRE were smaller banks, and the taxpayer bailout was FDIC. I’ve complained about FDIC for decades, but no one on either the left or the right seems to care.

    You said;

    “And furthermore, anyone still pushing or supporting these myths is undermining the real culprit for the Great Recession: bad monetary policy.”

    Agreed, but that includes both the left and the right–both blame the recession on the banking crisis.

    Edwin, I never said there is any simple connection between the welfare state in the euro crisis–obviously Denmark didn’t get into trouble. And I’d say the same about our banking crisis and laissez-faire capitalism. Hong Kong is even more laissez-faire, and avoided the crisis.

    I have numerous posts pointing out that Krugman’s defense of the welfare state isn’t very persuasive.

    Floccina, I agree the problem was mostly monetary, and that weak banks should fail.

    Turner, I don’t see how you can say tax avoidance isn’t a problem of the welfare state.

  38. Gravatar of Turner Turner
    13. November 2011 at 08:31

    Sumner – surely tax avoidance is a problem whether or not a welfare state exists?

    ‘Reagan cuts the Federal Register in half in the early 80s and the US finally gets significant real GDP growth. There are lots of examples of deregulation working.’

    Post hoc ergo propter hoc. I think the U.S. recovery had a lot more to do with Volcker lowering rates. Furthermore, what was the distribution of this growth? Seems to be that median incomes stagnated, private debt accelerated and all the gains went to the top. Not much to boast about.

    The West also did pretty well with tight regulation in the post-WW2 boom.

    ‘I’ve never heard anyone present a real theoretical argument for why regulations need to exist and why they work.’

    They work for the same reason any law ‘works’ – they exist to prevent forms of fraud, instability, protect workers and consumers, prevent certain players gaining too much market power, etc. I’ve never seen anybody say ‘why do laws against murder work? How do police know better than murderers?’ You’re just committing Adam’s Fallacy, arbitrarily separating the economic sphere from the rest of the world (though admittedly Smith didn’t do this to anywhere near the extent some do today).

    ‘All I hear is people like you blaming everything on republicans and Glass-Steagal being repealed.’

    Straw man, I never mentioned them. You reveal your partisan leanings here.

    ‘You guys have no theory to back you up’

    LOL. What? Have you any read any Keynes, Sraffra, Kaldor, Robinson, Keen, Minsky, etc? Porbbaly not – I’m sure you dismiss them as ‘ignorant’ of mainstream economics and ignore them. That’s how neoclassical economics survives, despite both internally contradicting itself and bearing no resemblance to the real world.

    ‘and the weakest circumstantial empirical evidence possible.’

    You mean like one of the biggest financial crises on record? The fact that at the heart of almost every financial crisis on record, there have been free capital flows and deregulation? The fact that NO countries on record have ever done well by getting rid of all their regulations? (Please don’t cite HK as it is a) a massive special case due to being a city state and b) not as laissez faire as some might think)

    ‘It’s sad that in social sciences theories can’t be disproven with data.’

    Apparently you think so, otherwise you wouldn’t be clinging to right wing economics after 2008.

    ‘but I’d be happy to tear apart you reasoning any day’

    Go ahead.

  39. Gravatar of Scott Sumner Scott Sumner
    13. November 2011 at 19:49

    Turner, Yes, but surely it’s a bigger problem if you do have a welfare state, because you need higher tax rates.

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