Get real — Greece edition

It was natural that a platform like that of the Syriza party would emerge in Greece. Essentially: “We’ll do all the right things (confront our creditors, etc etc), and you don’t have to part company with the euro.” After all, who would want to substitute their euros with an inferior money? Certainly not Greeks. This is the Turkeys-don’t-vote-for-Christmas problem. We saw it in the Scottish referendum in spades. 

I am seized by a feeling of terrible irresponsibility in all this. Briefly: It can’t work. Not unless Greece’s EU partners decide to federalise Greece’s debt (pdf), i.e. share it round as an EU debt. Failing that, what will take place are some compromises round the edges — a loan maturity here, a tax cut there. But the constraints are huge. Having sold the Greek electorate on the sweet music of liberation, only to deliver them to further purgatory, the patchwork that is Syriza is going to do terrible harm. 

The harm is in the dashed hopes. Bound to the euro, there will be no return to growth, no serious reduction in unemployment. What Syriza has done is open the way for the far-right in Greece to play the honesty card. It is them who will soon be saying, “We can deliver you from all this. We have no illusion about staying in the euro. It is time to get real.” In fact, they are already saying so

It will be crushing to see the correct policy seized by the wrong party. You might hate historical comparisons, but there’s no denying that the two clearest (and, economically, most successful) rejections of the hard-money orthodoxy of the Great Depression (necessitated by the gold standard then, as today’s austerity is necessitated by the euro) were carried out by ultranationalists: Germany’s Nazi party and Japan’s Seiyukai.

In their 2000 paper on austerity’s culpability in the Great Depression, Peter Temin and Barry Eichengreen recall the German political situation circa 1930, as the austerity policies of Germany’s chancellor, Heinrich Brüning, were sending the economy into a tailspin:

In Germany the Socialists were as committed to the gold standard as Brüning, which they showed by rejecting calls within their party for more expansionary policies. By increasing their seats from twelve to 107, German voters transformed the Nazis from a fringe party to a presence in the Reichstag in the 1930 election.

Note that the Nazis, even in their landslide two years later, did not achieve a parliamentary majority:

Instead, the voters conferred enough respectability on the Nazis to allow Hindenburg, the Weimar President, to invite the Nazis into the government. It was all the Nazis needed to take over German society and cause endless grief to their own and other people.


Eichengreen, B. and Temin, P. (2000), “The gold standard and the great depression”, Contemporary European History 9:2 (July)
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Digesting the business angle of #indyref

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Disappointing reasons to vote No

A response to Ewan Morrison’s “Yes: Why I joined and why I changed to No“.

Ewan Morrison discusses why he was turned off the Yes campaign. 

To summarize, as faithfully as I can:

(1) Morrison joined the Yes camp in the hope of finding some debate. Instead he got rah-rah. People were not interested in hearing awkward questions (there are plenty!). (2) Morrison came to see the Yes movement as something other than a campaign for independence. It was a barely-clothed power grab. It was the sum of opportunist parties hoping to be big fish in a smaller (post-independence) pond. (3) These ambitions will come into the open in the event of a Yes vote, (4) are incompatible and (5) will show Scotland in a poor light.

Some highlights, again trying to be faithful to the essay:

“[T]here is no way that the groups under the banner of Yes could actually work together; they’re all fighting for fundamentally different things.”

“The … factions within the Yes camp are all dreaming that they will have more power in the new Scotland ‘after the referendum.’ Bigger fish in the smaller pond.”

“The dream will die as soon as the singular Yes gets voted and Scotland then turns into a battleground of repressed and competing Yesses. Once the recruitment machine has served its purpose it will collapse and the repressed questions will return with a vengeance.”

“What makes this worse than remaining in the UK is that Scotland will be fighting out its internal battles on a world stage after demonstrating it intends to run its new politics on an illusion of unity, a unity that breaks up even as it is observed.”

My response:

For each of these quotes, my reaction is, Why is this a ‘bad’ thing? Why is the prospect of unruly politics surprising, much less a reason to maintain the union? My succinct response to this essay is that ‘messy politics’ is the whole point! Let the arguments spill into the open. Let the best case be made. Let people advance arguments and let people make decisions via the ballot box — post independence. The vote on Thursday is about independence. Cameron likes to remind Scots that it isn’t a referendum on Tory rule. Nor is it a referendum on Alex Salmond.

Some specific responses to the summary points as I discerned them:

(1). The Yes camp is throttling awkward questions / it’s a cult

This reminds me of the person who shows up to the wrong meeting. There are meetings where policies are discussed, and there are meetings where campaigns are discussed and organised. Someone showing up to the latter expecting the former is going to have a hard time. There was a policy dialogue and a chance to comment on the white paper setting out the outlines of an independent Scotland. That’s where the questions needed to come. The yes campaign is about … well, getting a yes vote. By all means keep asking awkward and tough questions, but the setting is key. The white paper is human-made, it is flawed. There will be much arguing over it. That should be welcome.

(2). The Yes camp is a sum of parties (and people) seeking power

Granted. But I do not see the problem with this. I wouldn’t expect it to be otherwise.

(3.) These ambitions will be exposed after a Yes vote.

That will be helpful — one hopes that better policies will result.

(4). These parties will find their aspirations are incompatible.

Again this is right and correct — and expected in a democracy.

(5). This will show Scotland in a bad light.

The author states that “what makes this worse than remaining in the UK” is that “Scotland will be fighting out its internal battles on a world stage”.

If this is the reason to stay in the UK, then there is no good argument for staying in the UK.

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Infantilisation of the electorate

The subtext of some of the key arguments against a ‘Yes’ vote is infantalising. For example:

‘You shouldn’t be supporting a vainglorious leader/party’ i.e. Alex Salmond/SNP. 

‘You won’t have a currency union, and there’s no Plan B’.

Even if these are true (and the second one certainly is), why is that a reason to vote ‘No’? Basically the subtext to these warnings is: ‘You are passive participants in the life of your/our nation. Other people (leaders) do things for you. If they and/or their plans come up short, vote No.’

What’s wrong with this? Firstly, it says ‘you are not enfranchised — you cannot do anything about these deficits’ (either in people/parties or policies). This is infantilising. With 97% of Scots registered to vote, and turnout projected to be over 90%, there is every reason to expect people no longer to stand aside passively and ‘let’ bad things happen. Not happy with Salmond/SNP? Boot them out! Not happy with the currency strategy? Elect a party with a better plan.

The point is that this is a bigger issue than the immediate policy programme. Naturally that’s important — it’s huge! But it is human and it is fallible. The whole point is to get engaged and push something better if there is something you don’t like.

And that’s the fundamental reason why I support independence. It holds out the prospect of responsive politics, which is more feasible at a smaller scale.  

So stop with the “What if” scaremongering. What ever it is, it’ll be in the Scots’ hands to make it better.

There’s another way in which the campaign against independence is infantilising. Predictions of doom contain the subtext: Others might do this, but you probably can’t. Put differently: Scots are less able than [insert successful petite country here]. 

What motivated me to write this essay in the first place was still another form of infantilisation being encouraged among the electorate. This is the notion of ‘guarantees’. It goes like this: ‘You can’t guarantee me X, therefore I should vote No.’ This line of argument encourages people to think like children, relating to a state that either can or can’t give them candy.  

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Sham investment bank research

European monetary union represents a major step on the road to European integration. The euro will promote not only economic prosperity but also political stability by leading to intensified cooperation among the countries of Europe, a stronger focus on common interests and the establishment of common institutions to help solve conflicts.

Deutsche Bank Research (1998), “Europe’s New Currency: A Special Report”, July 20. Accessed on-line at

The not-so-big secret about investment bank research is that all banks subsidize it through their other (profitable) operations — nobody will pay for the stuff. And that’s for good reason. Be it Goldman Sachs cheering the “New Economy” of the 1990s (i.e. the idea that recessions had finally become obsolete) or Deutsche Bank declaring that the euro will promote political stability and “intensified cooperation” among European countries, there is no reason to think that investment banks have a crystal ball. 

That Deutsche Bank is now out with research predicting Scottish economic calamity from a Yes vote, and that the vote will go down among history’s greatest policy errors, is worthy of no more than a snigger. I think there’s a huge irony which has escaped the DB Research team, in likening a Yes decision with the US central bank’s decision to withhold liquidity in the face of a banking panic in the early stages of the Great Depression (1929-1933). Why did the Fed (the US central bank) withhold liquidity? Because it was conforming to that era’s conventional wisdom about the business cycle (roughly: recessions are good medicine to wring the excesses out of the economy). It was “obvious” to the Fed at the time that providing liquidity was dangerous. 

These are the same investment banks that cheer-led the growth of mortgage collateralisation and other asset securitisation which ultimately helped inflate the largest credit bubble of all time before 2007. These banks led the global economy nearly over a cliff the following year. Don’t pay them notice. 
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Small states > Big states

In 1957 in his classic book The Breakdown of Nations economist and political scientist Leopold Kohr persuasively and rigorously argued that small nations are the natural order having been throughout history the engines for enlightenment, innovation, mutual aid and the arts.  The large nation state, he argued, is not a reflection of improved efficiency but of superior force.

This passage is taken from “Should Large Nations Split into Small Nations?” by David Morris. The article reflects what seems to me an obvious reason to support disunion. I can appreciate that the idea is repugnant, or at the very least sad, to many of my fellow countrymen. But that response calls for reflection. Why are you so keen to keep the Scots with us? The desire that the union should not be broken is sometimes voiced by people who say that ‘nationalism’ is no just cause for decent people, that the independence vote is giving rise to ‘nationalist fantasy’ or some other risible facet of ‘nationalism’. But what else beside nationalism is behind the desire that the union must not be torn?

I will be pounding out several posts tonight on the referendum, hopefully covering:

and more.
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I can’t say how I’d vote “if I were a Scot”. If I were a Scot, I wouldn’t be me. But I can tell you my opinion: Yes; for independence. Better still, I can address the currency question.

On the politics, George Mombiot makes the case in I’d vote yes to rid Scotland of its feudal landowners and Scots voting no to independence would be an astonishing act of self-harm

I regret that the SNP have muddled the currency issue. The current stance is that an independent Scotland would go on using the UK pound. I call this the ‘Turkeys don’t vote for Christmas’ problem. It afflicts the electorates of benighted euro-area members, too. If your salary is denominated in pounds (or euros) — let alone your bank account — why would you deliberately choose a lesser unit? And it’s true that the Scottish currency, like the Spanish one, would be a cheaper unit than the incumbent one. I think overcoming this challenge requires a clear articulation of vision and a forceful history lesson: weaker currencies strengthen, and strong ones weaken. But that’s another topic. 

There isn’t such a thing as sovereignty without a currency. Ask Spain. In recent decades, there has been a lot of emphasis on the notion of “independent” central banking. Don’t believe a word of it. The government is the state and the central bank is subservient to it. “Independent” central banking was a ruse to address a well-known “time inconsistency” problem of the central bank. The problem goes like this. The government wants growth and jobs. Unanticipated inflation achieves this. Ergo, the central bank finds itself under pressure to ease, to allow a bit more inflation. An ‘independent’ central bank is relieved of this pressure, so it can focus on its mandate to stabilize inflation at a low level (or, in the case of the US central bank, combine this with one eye on growth and jobs). 

When it comes to the crunch — in times of severe crisis — the state is sovereign and the central bank works for it. Any serious analysis of the role of money in the economy acknowledges this fact. (Willem Buiter’s recent piece on Friedman’s ‘helicopter drop’ is a case in point.)  

Scotland needs a currency partly because a currency gives Scotland’s economy a price, different from England’s. Yes, that means it needs a currency that floats (never mind whether it’s a ‘free float’ pace Norway or a ‘dirty float’ pace Iceland). There is an exchange rate that suits Scotland’s economy, and that will evolve along with it. And that rate isn’t England’s. Frankly I don’t think England’s exchange rate suits England. It suits the City of London. 

The main thing is that a currency and central bank gives Scotland sovereignty. You’re better off borrowing in a currency that you create. Until the ECB promised to “do anything” to save the troubled euro-area debtors, those self-same debtors were well aware of how costly it was to have borrowed in a currency over which they have no control. 

The currency is the most important price in the economy. It is the price of the economy. That’s why, after several years of hard experience, it’s the preferred path for so many countries today — not least, the UK. Knowing this, and knowing that it works perfectly well for the aforementioned Scandinavians (including Denmark and Sweden), you have to ask yourself: Am I saying Scotland is less able than these countries to run its own currency? Personally, I find that laughable. When it comes to free markets and capitalism, Scotland wrote the book

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The eurozone crisis and the Great Depression — lecture slides and audio track

Click here for the PDF of slides of my talk on the Euro-area crisis and its parallels in the Great Depression. 

Click here for the MP3 audio file accompanying these slides. 

Note: After the first couple of minutes, I do state which slide I’m referring to — at around Slide 5.
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Finally a difference of opinion with Krugman

There’s a reason he’s been called Krugtron. Oppose him at your peril. 

Nevertheless, I’d personally play down the ‘financial catastrophe’ angle of failure to raise the debt ceiling. 

Krugman in today’s NYT: “it looks quite possible that default would create a huge financial crisis”.

I think it would certainly hurt from a GDP point of view, through the cuts and the fiscal multiplier, but I don’t think it would trigger a flight from the Treasury market / dollar, since the Treasury market’s main virtue is liquidity. Yes, that liquidity was probably founded on (lack of) repayment risk (although I’d be open to arguments otherwise), but it is probably self-sustaining, at least for a while yet. And that’s a shame. Because if there’s one thing the US economy needs, its less of the “exorbitant privilege” of cheap financing for trade deficits. The economy needs a weaker dollar.
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The jobs problem: structural mismatch, or inadequate demand?

Is the high unemployment rate something we have to get used to? “Yes” say the ‘structuralists’ who view the problem as one of mismatch between the jobs needed by the modern economy and the skills offered by the workforce. Since this is a gap that would take a long time to close, we may as well get used to a higher rate of unemployment than we used to do. 

One key implication of this position is that the economy’s capacity is much lower than we thought — in which case there’s no point trying to run it any faster, because that would only translate into higher inflation. 

This has always struck me as a defeatist attitude and more importantly dismissive to those out of work and those soon to be seeking work. Luckily, it’s also hogwash. The economy is not adding enough new jobs because there isn’t enough demand to justify them. In this vein, two Federal Reserve economists yesterday released results from their research attempting to prove the ‘structural mismatch’ position (1/). They find: 

All told, while some skilled labor shortages are being reported in the manufacturing sector, the extent to which these shortages are restraining production appear about in line with the current sluggishness in the labor market and the degree of slack in the manufacturing sector. Furthermore, the finding that skilled labor shortages are not a significant and widespread restraint on production is consistent with other data continuing to show subdued increases in the wages and salaries of manufacturing workers.

1/ Looking for Shortages of Skilled Labor in the Manufacturing Sector 
Jessica Stahl and Norman Morin
September 26, 2013
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