Wednesday, January 5, 2011

It's Not the Euro, Paul

When I went to Baylor School in Chattanooga (when it was an all-boys' military school), one of our traditions was to have senior write-ups in the yearbook, along with a quote that would characterize the particular senior. (Perhaps my favorite quote was that given to Mike Aiken of our Class of 1971, which read, "Life is one damn thing after another." If you know Mike, you know that one is perfect.)

For another friend who was graduated several years before me, there was this: "The problem with the world is wine, women, and song. We must stop singing." Obviously, that line is meant to be humorous, but when someone actually tries to apply something similar to economic analysis, well, the joke ceases to be funny.

One of the reoccurring themes in Paul Krugman's blog posts has been his dissatisfaction with the results of European countries adopting the Euro as a single currency. In a recent post, he writes:
As readers may have guessed, I’ve been working on a euro-related project; more about that one of these days. But for now, I thought it might be worth explaining a bit more about how I see the political economy.

Some readers have chimed in that the euro is essentially a political rather than economic project. Well, it’s both; that has been the European strategy ever since the Schuman declaration. The point is to deliver a series of economic integration plans that do double duty: they’re economically productive, but they also create “de facto solidarity”, moving Europe closer to political union.

For 60 years, this strategy has been highly successful. Europe is one of the great, inspiring stories of the modern world, maybe of all time: peace, prosperity, and democracy flourishing where once there were minefields and barbed wire.

But: the strategy depends on each move toward economic integration being both a political symbol and a good economic idea. That was clearly true of coal and steel, the common market, the eurosausage, and so on. It is, however, by no means clear that the euro passes that test. Europe’s limited labor mobility (although there’s more than there used to be) and, crucially, lack of fiscal integration makes a common currency a dubious proposition at best.
In this and in other posts and columns in which he blames the Euro for much of the turmoil on the Continent, Krugman confuses cause with effect. As I have noted in other posts dealing with Krugman's Euro fetish, Krugman seems to believe that the "solution" for Europe is yet another round of inflation, a "hair of the dog" monetary and fiscal strategy.

At the center of this problem is the fact that the huge European welfare apparatus, along with the power of government employee unions such as those in Greece, Spain, and Frace, only can be supported if the economies of those nations produce enough wealth to enable governments to spread it around. Furthermore, the taxation and regulation policies of those nations must be such that it is possible for private firms to create enough wealth in the first place.

Unfortunately, one of the things that happens in economic downturns is that tax revenues fall and it becomes obvious that the lavish government benefits given to government employees cannot be supported by that country's economic activity. Now, as Krugman has noted, in the past, when each of these government controlled its own fiat currency, one "solution" was devaluation, which in reality is nothing more than a government's admission of trying to paper over its losses by engaging in a glorified printing of new money.

This, economically speaking, is not a solution at all. It simply masks the underlying problems and creates new problems in the process. Not only does this strategy continue the charade of "giving" people something that is illusory, but it also undermines an economic recovery.

However, when a country does not control its fiat currency, as is the case of the Euro, then the problems become much more front-and-center. Greece, for example, is in trouble because it no longer can afford to give government employees pay and benefits that they are not earning, and the Greek government employees have responded by going on a rampage of rioting, murder, and destruction of property.

The Euro is not the cause of this trouble; instead, it is the messenger, the entity that bears the bad tidings. What is Krugman's response? It is shoot the messenger. In Krugman's view, there is nothing wrong with runaway government benefits; in fact, he argues, such spending helps the economy by "stimulating" it.

While there often is much not to like about "austerity" moves, nonetheless for the most part they are little more than policies that reflect the economic reality of the present time. (My problem with "austerity" is that it often emphasizes the implementation of new taxes without cutting enough spending; I'm all for the reality of "pay as you go," but we have to understand that we cannot kill the Golden Goose in the process.)

Krugman really seems to believe that we can pretend we are creating wealth simply by borrowing, spending, and creating new money. Yet, these actions don't create wealth; they destroy it. Krugman may call such a statement the product of "zombie economics," but to claim that government spending by itself "creates wealth" is the real "zombie" position.


Mike M said...

Krugman is a statist. Thus it is consistent that he would blame an object (the euro) instead behavior (lack of adult decisions) for the mess in Europe. A statist abhors individual responsibility because it reduces the dependency on the state. It’s the gun not the shooter, it’s the drugs not the addict, it’s the alcohol not the drunk driver, its evil credit card companies not the spender, its oil company’s not geology-bad politics-and dollar debasement, etc. It’s always someTHING not someONE.

He stated; “ and willing to take some serious risks, like the creation of E-bonds, in an attempt to turn this thing around.” Brilliant! Create new debt to solve a compounding debt problem.

Paul the Nobel people called, they want their prize back. Wait … they give those away like Halloween candy now … never mind, keep it.

Daniel Hewitt said...

Yet during good times, Krugman attributes Europe's success to its progressivism:

Anonymous said...

Does Krugman realize that when devaluation happened in Argentina, households and businesses with foreign currency denominated loans found their earnings and assets reduced, but loans still the same?

For Ireland, Spain, and Greece, if they were still on domestic currency, it is entirely possible (and likely) that foreign investment would only come in more stable euros, and devaluation would destroy those debtors even faster.

Bob Roddis said...

Krugman is nothing but a court intellectual for the ruling class whose task is to bamboozle the public into accepting and celebrating the embezzlement of their wealth and lives. As Murray Rothbard said:

“All States are governed by a ruling class that is a minority of the population, and which subsists as a parasitic and exploitative burden upon the rest of society. Since its rule is exploitative and parasitic, the State must purchase the alliance of a group of “Court Intellectuals,” whose task is to bamboozle the public into accepting and celebrating the rule of its particular State. The Court Intellectuals have their work cut out for them. In exchange for their continuing work of apologetics and bamboozlement, the Court Intellectuals win their place as junior partners in the power, prestige, and loot extracted by the State apparatus from the deluded public.”

“The noble task of Revisionism is to de-bamboozle: to penetrate the fog of lies and deception of the State and its Court Intellectuals, and to present to the public the true history of the motivation, the nature, and the consequences of State activity. By working past the fog of State deception to penetrate to the truth, to the reality behind the false appearances, the Revisionist works to delegitimize, to desanctify, the State in the eyes of the previously deceived public. By doing so, the Revisionist, even if he is not a libertarian personally, performs a vitally important libertarian service.”

New Keynesian said...


And Argentina suffered because it had a peg to the dollar. Fixed currencies are an absolute nightmare they're the same in essence as price controls. Why wont you gold standard lunatics get this?

New Keynesian said...

I had a brilliant post about why fixed currencies were stupid and floating were the way to go. But it looks like this site is deleting posts again. I'll summarize. Take Latvia vs Poland and Iceland. latvia kept its asinine peg, suffered more result, Poland and Iceland de-valued their currecies are doing much better

Mike M said...

NK Said:“Why wont you gold standard lunatics get this?”
“Poland and Iceland de-valued their currecies are doing much better”

Gold is money. Nothing more, nothing less. A peg to honest money is not an issue so long as you honor the commitment. A gold standard does not necessarily require 100% backing. Only a percentage level that the market believes you will be serious and maintain. Thus you cannot accumulate more debt than is allowed by the backing.

Iceland defaulted on its debt via currency devaluation. It would not have had to do so had it not accumulated the debt in the first place.

“It’s not the economy stupid,” It’s the DEBT stupid”

Why won’t you fiat currency lunatics get this?

New Keynesian said...

" Nothing more, nothing less. A peg to honest money is not an issue so long as you honor the commitment. A gold standard does not necessarily require 100% backing. Only a percentage level that the market believes you will be serious and maintain. Thus you cannot accumulate more debt than is allowed by the backing.

Iceland defaulted on its debt via currency devaluation. It would not have had to do so had it not accumulated the debt in the first place.

“It’s not the economy stupid,” It’s the DEBT stupid”

Why won’t you fiat currency lunatics get this?

January 5, 2011 12:02 PM

Hey mike M
Ever have an impure thought about your neighbor's wife?indulge a little and expand your waistline after holidays? Run an occasional monthly overdraft on your credit card to pay the bills? When was the last time you bought a car using cash, or your home? I'm all for self-restraint, but sometimes circumstances are out of your control. Money has no constant real value. It wouldn't even on a gold standard, or private market money. Its crazy to fix debts in units of currency as if they were constant. Therefore, the only way to escape the burden of debt is by outright default, Either by inflation or by forcing the bondholders to take a massive haircut. Preferably, i'd make sure to put in a "deflator" clause in the debt contract, to index debt to falling prices, so we dont have to fear debt deflation. You Austrians should be in favor of that. After all, Murray Rothbard himself said liquidity crises can be solved by falling prices. I wonder if he understood where his logic would take him. It would take him to the most liberal default laws imaginable, because debt contracts aren't downward flexible. Whether they should be is another matter entirely, I happen to believe they should be.
and thats the free market solution.
And Bob Roddis, spare me the morality speech. Is it moral for one party of the contract to suffer because something which neither of them could have anticipated. people aren't perfect or omniscient

Mike M said...

NK Said: “indulge a little and expand your waistline after holidays?”

You’re funny. Yes but then I STOP EATING so much. Government will never push themselves away from the table voluntarily. They can only stay at the table overeating because of fiat currency.

BTW people used to buy their cars with cash. The only debt the average American ever really had was on their home and even that was with substantial equity and was paid off prior to retirement.

You seem to accept the present construct as normal. There is a whole lot of history to learn from prior to whatever year you were born.
This year is the 40th anniversary of the USD going completely fiat. 40 years may seem like a long time to us mere mortals but in terms of monetary history its nothing.

Bob can speak for himself but this is about morality. The government can’t hide behind “we didn’t anticipate” excuse. They never had any intent of paying off the debt they incurred in real terms. Is that moral? If I enter a transaction knowing I will not honor it, is that moral? If I posses the power and tools to default through debasement unilaterally and you have to accept, is that moral?
Please don’t try and tell e that TIPs can protect me. They are tied to the CPI and that is a political statistic not an economic statistic.

Daniel Hewitt said...

Latvia vs Poland and Iceland. latvia kept its asinine peg, suffered more result, Poland and Iceland de-valued their currecies are doing much better

Latvia had a much bigger bubble than Iceland in the first place:

Bob Roddis said...

Morality speech:

With all of its faults, the pre-fed system was better and money had a more consistent value:

Looking at the pre-Fed era, the US consumer price index (CPI) declined at an annual average of 0.5% and real gross domestic product (GDP) grew at an annual 4% during 1800–1912; this would have been labeled grave deflation by Bernanke and would have been considered as a danger to the economy.

During the Fed era, the CPI rose at 3.5% per year and real GDP at 3.25% per year during 1913–2009. Hence a dollar bought almost twice as much goods in 1912 as it did in 1800; and in 2009 it bought less than 5% of the goods it bought in 1913.

As usual, the money diluters are allegedly trying to solve problems that do not exist (fluctuating money value and alleged lack of growth) with a system of criminal fraud and embezzlement.

Of course, under an Austrian free market money system, there wouldn't be artificial booms or assets bubbles followed by inevitable busts and massive price deflation.

Anonymous said...


Was it seems someone as fallen into the hole where they think there is a link that exist between increased savings and the business cycle.

It doesn't. It's all New Keynesian crap. Try using empirical evidence.

William L. Anderson said...

First, and most important, I do not delete posts no matter what New Keynesians claims. If a post disappears, ask the people at Blogger, not me.

You can accuse me of a lot of things, but never accuse me of trying to squelch what others are writing. That is an insult, period.

Second, a currency devaluation is not a policy so much as it is an admission of inflation. However, debasing a currency, while it might have some short-run positive effects, over time makes things worse.

Anonymous said...

Japan has had zero inflation (deflation actually) and zero real gdp growth the past 10 years.

Another Anonymous said...

Gold is money. Nothing more, nothing less.

Gold is a chemical element. It is not money, and it never was. For a relatively short period, much of the world was on a gold standard, coming closer to "commodity money" than ever before or since, but money for millenia has been much closer to modern post-1971 state fiat money. Gold mine owners were/are smart enough to exchange it for things of real value.

Credit, credit money, "fiduciary media", fiat money is the ancient and true concept of money. The gold standard that Austrians love is the novelty. Nothing could be more ridiculous than the widespread idea that the ancient practices of banking came from relatively recent storage receipts for gold. I guess sex was invented only a couple centuries ago too. Monetary use of Silver and Electrum is older than pure gold, but they were used originally as anti-counterfeiting measures, and silver as a standard of weight, not as a commodity money standard. Because the Kilogram (and the pound) is ultimately defined by a cylinder of platinum/iridium alloy in Paris, is the world on a platinum/iridium monetary standard?