There were five posts yesterday. The first was “German Wages and Portuguese Competitiveness (A Bit Wonkish):”
I very much agree with Avent and Smith that Cowen, who worries that such a policy would largely lead to inflation in Germany rather than a boom in Portugal, is completely missing the point; that’s a feature, not a bug.
But what really puzzles me about Cowen’s exposition here is his misplaced focus on the extent to which Portugal and Germany are in direct competition with each other, or to which Germany is Portugal’s main export market. This is very nearly irrelevant — because the point is that Germany and Portugal, for better or (mainly) worse, now share a currency, and what happens in Germany very much affects the value of that currency relative to other currencies.
Cowen writes that rising wages in Germany
solves (at best) only one of the core problems of the eurozone, namely incorrect relative prices between Portugal and Germany. It helps less with the “Portuguese nominal wages are too high” problem …
OK, stop right there. When you say “Portuguese nominal wages are too high”, you have to explain, too high relative to what? As Rudi Dornbusch always used to say, it takes two nominals to make a real.
And the answer, clearly, is “too high relative to German wages”. What else could it be?
But, you say, Portugal doesn’t compete that much with Germany. Ahem. Suppose that I could wave a magic wand (or play a few notes on a a Magic Flute) and suddenly increase all German wages by 20 percent. What do you think would happen to the value of the euro against the dollar and other currencies? It would drop a lot, yes? And Portuguese exports would become a lot more competitive everywhere, including non-German and indeed non-Euro destinations.
I guess I thought this was obvious. Apparently not.
Again, as Ryan says, the crucial difference between German/ Portuguese economic relations and, say, US/
El Salvador(whoops: some central American countries have dollarized. But that was their choice, not part of a grand project like the euro) relations is that Germany and Portugal share a currency. This creates obligations for Germany, whether it likes them or not.
The next post of the day was “Macoeconomic Machismo:”
Atrios, weighing in on the Kinsley Kontroversy, suggests that the evident urge to make Someone Suffer — Someone Else, of course — reflects sadism. But I don’t think that’s right. Lack of compassion, sure; an inability to imagine what it must be like for someone less fortunate than oneself and one’s friends, definitely. But I think that the linked Scott Lemieux post, which equates the austerian fixation on stagflation with the neocon fixation on Munich, is much closer to the mark.
It was obvious during the runup to the Iraq war that what was going on in the minds of many hawks — and not just the neocons — was not so much a deep desire to drop lots of bombs and kill lots of people (although they were OK with that) as a deep desire to be seen as people who were willing to Do What Has to be Done. Men who have never risked, well, anything relished the chance to look in the mirror and see Winston Churchill looking back.
Actually, I suspect that even the torture thing had less to do with sadism than with the desire to look tough.
And the austerian impulse is pretty much the same thing, except that in this case the mild-mannered pundits want to look in the mirror and see Paul Volcker.
Much of the problem in trying to stop the march to war was precisely the fear of many pundits that they would be seen as weak and, above all, not Serious if they objected. Austerity has been very much the same thing — and again, it’s not just the right-wingers who are afflicted.
Let me illustrate that point with two parallel diagnoses of economic crisis, 78 years apart. The first is from John Maynard Keynes, The Great Slump of 1930; the second from Barack Obama’s first inaugural, in January 2009. Keynes:
This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.
We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed.
Do you see where it goes wrong? Most of the way through, Obama is getting it right: this is a “colossal muddle”, a technical problem that needs fixing. But then he suddenly swerves into the language of Very Serious People, talking about the need to make unpleasant decisions (which is always there, but if anything less so in a depression).
I was very upset about this at the time, but not upset enough — for there, right at the beginning, was the austerian temptation, adulterating the message of the man who should have been that temptation’s fiercest opponent.
So if you like, the problem is Seriousness rather than sadism. On foreign policy, it’s always 1938; on economic policy, it’s always 1979. And the colossal muddle goes on.
The third post yesterday was “Dead Ingot Bounce.” (That phrase does make me chortle.)
A couple of weeks ago I mentioned that I had been getting some grief from goldbugs, who were reveling in the fact that gold went up some after I wrote about its fading appeal. I expressed skepticism — as you always should after any short-term price movement, especially in an asset with as much emotional freight as gold — and suggested that it might be a dead ingot bounce. Hmmm:
Yes, I know gold had a huge rise in previous years. I also know that there may be more bounces ahead. But mostly I just want to claim the phrase …
Fourth up yesterday was “Where Are The Deficit Celebrations?”:
For three years and more Beltway politics has been all about the deficit. Urgent action was needed to avert crisis. A Grand Bargain absolutely had to be reached. Fix the Debt, now now now!
So where are the celebrations now that the debt issue looks, if not solved, at least greatly mitigated? And it’s not just recovering revenues: health costs, the biggest driver of long-run spending, have slowed dramatically.
What we’re getting from the deficit scolds, however, are at best grudging admissions that things may look a bit less dire — if not expressions of regret that the public seems insufficiently alarmed.
Jamelle Bouie gets at a large part of it by noting what was obvious all along: for many deficit scolds, it was never really about the debt, it was about using deficits as a way to attack the social safety net. Deficits may have come down, but not the way they were supposed to — hey, we were supposed to be kicking 65 and 66 year-olds off Medicare, not doing something so goody-goody as managing costs better.
There is, however, a secondary factor: think about the personal career incentives of the professional deficit scolds. You’re Bowles/Simpson, with a lucrative and ego-satisfying business of going around the country delivering ominous talks about The Deficit; you’re an employee of one of the many Pete Peterson front groups; and now, all of a sudden, the deficit is receding, and you had nothing to do with it. It’s a disaster!
And so the deficit progress must be minimized and bad-mouthed.
Of course. Because it makes it harder to punish the olds, the poors and the browns… The last post of the day was “The Theory of Interstellar Finance:”
The theory of interstellar trade is a well-understood topic, with an extensive literature consisting of one paper (pdf) I wrote in 1978. Interstellar finance, however, is less well covered.
That’s all about to change, however. I’m reading an advance copy of Charlie Stross’s Neptune’s Brood. (Hey, I have connections!) And it is the best thing by far written on the subject to date, partly because it is, as far as I know, the only thing written on the subject to date.
It’s also a fantastic novel.
Thanks for the tip! I love Stross’ work.