Galbraith and Krugman on the Greek Deal

Michael Stephens | February 28, 2015

If you haven’t read it already, Senior Scholar James Galbraith shared his take on the four-month Greek deal in Social Europe:

there was never any chance for a loan agreement that would have wholly freed Greece’s hands. Loan agreements come with conditions. The only choices were an agreement with conditions, or no agreement and no conditions. The choice had to be made by February 28, beyond which date ECB support for the Greek banks would end. No agreement would have meant capital controls, or else bank failures, debt default, and early exit from the Euro. SYRIZA was not elected to take Greece out of Europe. Hence, in order to meet electoral commitments, the relationship between Athens and Europe had to be “extended” in some way acceptable to both.

But extend what, exactly? There were two phrases at play, and neither was the vague “extend the bailout.” The phrase “extend the current programme” appeared in troika documents, implying acceptance of the existing terms and conditions. To the Greeks this was unacceptable, but the technically-more-correct “extend the loan agreement” was less problematic. The final document extends the “Master Financial Assistance Facility Agreement” which was better still. The MFFA is “underpinned by a set of commitments” but these are – technically – distinct. In short, the MFFA is extended but the commitments are to be reviewed.


If you think you can find an unwavering commitment to the exact terms and conditions of the “current programme” in that language, good luck to you. It isn’t there. So, no, the troika can’t come to Athens and complain about the rehiring of cleaning ladies.


Greece won a battle – perhaps a skirmish – and the war continues. But the political sea-change that SYRIZA’s victory has sparked goes on.

Galbraith was recently interviewed by RNN’s Sharmini Peries on the same topic:



continue reading…


The Greek Debt Problem and Selective Historical Memory

Michael Stephens | February 27, 2015

Michalis Nikiforos, Dimitri Papadimitriou, and Gennaro Zezza, who put together the Levy Institute’s stock-flow consistent macroeconomic model and simulations for Greece, have just released a new policy note, the upshot of which is that restructuring Greece’s unsustainable public debt is a necessary but not sufficient condition for a sustained economic recovery in that country. They also point to an interesting historical precedent that ought to inform the ongoing discussion of Greece’s debt and the conditions imposed by its official creditors.

The troika’s official story—about how Greece’s debt-to-GDP ratio will be brought down from its current 175 percent to 120 percent by 2022—is, as the authors put it, “wildly implausible.” The official forecasts depend upon large primary surpluses (in excess of 4 percent of GDP beginning in 2016) being accompanied by robust economic growth rates (based on, according to the official story, expanding net export surpluses and dazzling growth in private investment)—which is, the authors point out, virtually unprecedented.

But even if it were possible for Greece to pay down its public debt through continuing austerity, Nikiforos, Papadimitriou, and Zezza argue that this should be opposed on both moral (with respect to consequentialist considerations and principles of fairness) and prudential grounds. In this context, they quote Keynes’s dissent regarding the terms imposed on Germany by the Treaty of Versailles; a quotation which could just as effectively be deployed today in defense of Greece:

The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,—abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man’s history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers. (Economic Consequences of the Peace [1919])

In yet another twist, precedent for how the Greek debt situation ought to be handled can also be found in German history—in the aftermath of its next war. According to Nikiforos, Papadimitriou, and Zezza, Germany’s post-WW2 experience provides us with a template for a bold Greek debt restructuring and recovery plan. The authors calculate that Germany was the beneficiary of debt cancellation amounting to more than four times the country’s 1938 GDP (or West German GDP in 1950). And these calculations don’t include foregone war reparations or foregone interest payments:

around DM3 billion in annual income transfers to foreign countries was avoided. This is a very significant amount given that West German exports totaled no more than DM8 billion in 1950. For Germany to find DM3 billion without a contraction of its GDP and imports would have required a 40 percent increase in exports.

We are often told how the trauma of Weimar hyperinflation shapes the German approach to policy to this very day (here’s a NYTimes headline from 2011: “Haunted by ’20s Hyperinflation, Germans Balk at Euro Aid”). In the context of the renegotiation of the terms of Greece’s bailout, Germany’s post-WW2 experience, in which it was the beneficiary of “the largest debt restructuring deal in history,” seems not to have left so indelible a mark on its national memory (at least as measured by the stance of current leadership toward the Greek plight).

As pointed out by Nikiforos, Papadimitriou, and Zezza, the debt cancellation and subsequent extensive reconstruction efforts orchestrated for Germany and other European economies played a significant role in shaping German economic history: “the postwar German economic miracle and the robust development of the rest of the European economies was not the result of abstract market forces. Instead, they were based on very specific and detailed planning.”

Selective amnesia aside, the key lesson to be drawn from the historical experience is that restructuring Greece’s public debt is only the very first step in what would be required to put the country back on its feet. The restructuring needs to be accompanied by a comprehensive policy program designed around fixing the eurozone’s structural defects and rebuilding a Greek economy that has suffered damage comparable to that inflicted by a protracted war.


Papadimitriou on Greece’s Four-Month Extension

Michael Stephens | February 25, 2015

Levy Institute President Dimitri Papadimitriou discusses the four-month extension of Greece’s bailout agreement with its eurozone partners and the mood in Athens in this interview with Kathleen Hays and Vonnie Quinn.


The Spanish Launch of Modern Money Theory

L. Randall Wray |

Sorry, I’ve been very busy in recent weeks, finishing up a book on Minsky and revising my Modern Money Primer for a second edition (more on both of those projects later).

Meanwhile, Lola Books is gearing up to release the Primer in Spanish next week. I’ll be in Madrid for the launch and for a series of meetings. I’ll give two presentations that are open to the public. Details are below. Hope to see our Spanish friends there!

March 5, 2015
I’ll make a presentation at the Izquierda Unida economic program. This event will officially introduce MMT into Spanish politics.
Location: Sede Central de CC.OO.
Address: c/ Fernández de la Hoz 12, planta baja; Madrid
Time :19 h. See the event flyer below.

March 7, 2015
Presentation of the Primer at the ‘Association pour la Taxation des Transactions financière et l’Aide aux Citoyens’ (Association for the Taxation of Financial Transactions and Aid to Citizens)
Location: Fuhem
Address: c/ Duque de Sexto 40; Madrid
Time: 11 h.

Wray_Event Flyer_Spain


What’s Wrong with David Leonhardt’s NYT Piece on Inequality?

Pavlina Tcherneva | February 20, 2015

The New York Times made waves this week with another piece on inequality, saying that it has not risen since 2007. The article was based on this paper by GWU’s Stephen Rose.

The article also suggests that expansions are not a good way of looking at trends in inequality (as I have done in the past, also covered by the NYT). Instead, one needs to look at the business cycle. It also concludes that, thankfully, because of government tax and transfer policies, inequality has not been “that bad” over the last few years and governments can clearly do something about it.

So what’s wrong with this picture?

Here is the graph that appeared in the NYT (I’ve reproduced it below showing only the bottom 90% and top 10% of families using the same Saez data).


Now let’s reproduce the exact same graph, using the same data but excluding capital gains. The trends reverse. The bottom 90% of families have lost proportionately more than the top 10% since 2007.


Now, I am not fond of excluding capital gains (I am in favor of annuitizing them), because they are very important to income dynamics, but still, without capital gains, the bottom 90% lose proportionately more (relative to the top 10%) than with them.

In any case, if we include the top 1% and the 0.01% in the above two charts, one would find that they do lose proportionately more including or excluding capital gains.

However, the bottom line is this: this exercise gives an extremely narrow look at income distribution trends, based on a very incomplete picture. As Nick Bunker from the Washington Center for Equitable Growth put it:

“Reasonable people can disagree about the best benchmark. But what isn’t reasonable is using a peak as a benchmark to claim inequality hasn’t increased over an incomplete business cycle.”

So let’s look at complete business cycle data. The following chart shows how the distribution of income growth has evolved from one peak to another.


There is a clear shift in trend after the ’80s. During 3 out of the last 4 complete business cycles, the wealthy 10% have gotten a proportionately greater share of the growth. And in the last full business cycle (2000-2007), they got all of the growth, while incomes of the bottom 90% fell. Yes, since 2007, both groups shared the losses about equally, but why should we be surprised that the top 10% shouldered 45% of the decline? (Again, this is not a complete business cycle yet!)

We live in a casino economy driven by serial asset bubbles, where the incomes of the wealthy (and not just their capital gains) are increasingly tied to stock market performance.

So when the biggest bubble in human history popped, the wealthy families lost a ton of income. At the same time middle class households fell into poverty, lost their decent jobs and pay, and got unemployment insurance or food stamps from the government. Can one really conclude from this that inequality is not “that bad”?

As an example, inequality will not be “that bad” if one person in the US earned 100% of all the national income, and then the ‘evil government’ (or ‘benevolent dictator’; take your pick) decided to tax most it and then gave transfers to the rest. But is this the kind of ‘better’ income distribution that we are aiming for? Aren’t we all talking about an economy where most people have decent jobs, decent wages, decent salary growth prospects, and a decent chance to participate and share in that growth?

There are many ways to slice and dice this data.

I have looked at expansions because they answer a very specific question: Once the economy returns to some normalcy and promises to deliver prosperity, to whom does it keep its promise? And the answer is, increasingly to the top 10%.

The problem with the NYT article is not the inequality chart, even though it shows an incomplete and thus misleading business cycle picture. The problem is the conclusion: that ‘taxes’ and ‘transfers’ are the solution to the deep structural economic problems that are causing the generation and distribution of incomes to be so inequitable from the very outset.

So the next time someone tells you that “a rising tide lifts all boats,” you can respond “no, increasingly it sinks most.”

(cross-posted from New Economic Perspectives)


Video: James Galbraith on the Latest Eurogroup Meeting

Michael Stephens | February 19, 2015

In the interview below, James Galbraith provides a behind-the-scenes account of the latest rebuff of Greece’s offer by German Finance Minister Wolfgang Schäuble and talks about what lies ahead (in English and Greek):


Greece Wants to Save Europe, but Can It Persuade Europeans?

Pavlina Tcherneva | February 18, 2015

Most analysis of the Greek debt crisis ignores an important reality: While Greece may be the villain du jour, every eurozone nation is profoundly short of cash. That’s because of a well-acknowledged, but not fully appreciated, flaw at the heart of eurozone financial architecture that converted a historically unprecedented number of nations from issuers of their own currency to users of a common currency.

Greece is simply the first country to experience the extreme consequences of that loss of monetary sovereignty. With no independent source of funding, no currency of its own, no central bank to guarantee its government liabilities, it has had to ask others for help. And as a condition for securing that help, Greece has until now been forced to consent to radical austerity policies.

As an analogy, consider a United States with a common currency but no Treasury to conduct macroeconomic policy, stabilization or stimulus spending. Imagine also that the Federal Reserve was banned by law from guaranteeing U.S. government debt. And imagine that one state, say, Illinois (think Germany) was the major net exporter, accumulating dollars (euros) while most other states (as is the case in the eurozone) were net importers, thereby bleeding dollars (or euros). Finally, imagine Illinois providing a loan to cash-strapped Georgia (think Greece), dictating that it implement slash-and-burn privatization of public assets and drastic cuts to state payrolls, pensions and other essential programs. This, in essence, is the situation in the eurozone today.

But Greek voters last month rejected continuation of an austerity program that has plunged their economy into depression, voting in a government determined to break out of the current terms on which Greece gets help from the Troika.

(Read the rest here at Al Jazeera America)


Countering Austerity Economics

Greg Hannsgen | February 11, 2015


As deflation sets in in the economies of Europe and Japan, Robert Kuttner’s words in Debtor’s Prison: The Politics of Austerity versus Possibility—an interesting, readable new volume—complement those of many of the Levy Institute’s scholars. The book argues that during the financial crisis and its aftermath, policymakers continually relied on excessively optimistic projections of economic growth. Hence, stimulus plans adopted by Congress were not up to the task. Meanwhile, monetary policy could do little more than keep the crisis from worsening. As a result, the recovery remained exceedingly weak, and deficits overshot estimates to boot. Kuttner notes that in spite of the end of the recession, US growth rates on the order of 1.7 percent in 2011 and 2.2 percent in 2012 have not been high enough “to blast out of the deflationary trap.”

The more recently released annual growth rate of 2.4 percent for 2014, as well as the 2.2 percent final figure for the year before, indicate that he is right when he argues against the political “consensus” that “borrowing money is the last thing the government should do.” In fact, fiscal policy still needs to be made more stimulative, perhaps through increased infrastructure spending. Kuttner decries a situation in which an “austerity lobby” is set to bat down such efforts in Washington.

Also notably, Kuttner uses a detailed historical argument to challenge the notion that fiscal austerity is the answer to foreign debt problems in highly indebted economies such as Greece. In essence, keeping economies in a debtor’s prison is not in anyone’s interest.

Kuttner’s book, published just last year, addresses many other big policy issues, including health care, all in relation to deflationary fiscal austerity and the problems and non-problems posed by high levels of different types of debt. His lucid argument brings home the sometimes counterintuitive insight from John Maynard Keynes that an increase in government borrowing is actually desirable in a world facing a huge unemployment problem. This situation, faced by policymakers, in fact differs completely from that of a household that is heavily indebted and finding itself with inadequate disposable income. “Austerity economics,” Kuttner points out, “conflates several kinds of debt, each with its own causes, consequences, and remedies. The reality is that public debt, financial industry debt, consumer debt, and debt owed to foreign creditors are entirely different creatures.”


The Modern Money Primer: Spanish Language Edition

L. Randall Wray | February 6, 2015

For our Spanish-speaking followers, my Modern Money Primer has just been released in Spanish and is available:

Modern Money Primer_Spanish Book

Here’s the description of the book:

El esfuerzo intelectual que se realizó en el campo de la física tras la aparición de la teoría de la relatividad o del modelo copernicano, no se llevó a cabo en la economía tras la aparición del dinero fíat. Teoría Monetaria Moderna es la plasmación de dicho esfuerzo intelectual. En este libro se expone claramente qué es el dinero en realidad y lo que es más importante se exponen las políticas económicas que deberían llevarse a cabo para llevar a la práctica un programa político coherente con dicha realidad. L. Randall Wray es doctor en economía y profesor en la Universidad de Missouri-Kansas City, así como director de investigaciones del Center for Full Employment and Price Stability. Además, pertenece al Levy Economics Institute of Bard College de Nueva York.

I’ll be in Madrid for the book launch. See you there. More details to follow.


Jobs for Greeks and for Americans, Too

L. Randall Wray | February 3, 2015

Here’s a nice piece:

The Workers’ Think Tank: With an eye on the United States and Greece, scholars at the Levy Economics Institute are developing plans to ensure full employment, by Sasha Abramsky, The Nation.

As Sasha notes, the Levy Institute has a novel approach to fighting unemployment: JOBS! Hardly anyone ever thinks about that—that the cause of unemployment is lack of jobs.

For some reason, virtually all policymakers and economists (including progressives) think that jobs will magically appear. True, some suggest that US unemployment is created because China (et al.) “steals” jobs that are rightfully due to America. Hence, the solution is to steal them back.

But why not just create more? Is it really that hard to come up with a list of things that people could usefully do, right here in America?

As Sasha writes, things appear to have improved in America,

“Yet scratch below the surface and you’ll see that the United States still has a considerable economic problem. While the official unemployment rate has fallen to 5.6 percent, the lowest since 2008, the percentage of the adult population participating in the labor market remains far lower than it was at the start of the recession. At least in part, headline unemployment numbers look respectable because millions of Americans have grown so discouraged about their prospects of finding work that they no longer try, and thus are no longer counted among the unemployed. Depending on the measures, only 59 to 63 percent of the working-age population is employed, far below recent historical norms.

Millions who lost their jobs during the recession have found work, but at lower wages and often for fewer hours per week than was the case before the financial collapse. In August, the US Conference of Mayors released data indicating that jobs created during the recovery paid an average of 23 percent less than jobs lost during the recession. That represents an extraordinary collapse in living standards for millions of people. Not surprisingly, according to the latest data, nearly one in six Americans are living below the federal poverty line.”

Unemployment remains far too high—and, more importantly, the employment rate remains far too low—because there are not enough jobs. Job seekers exceed job openings by a wide margin, across the entire spectrum of sectors. Here’s the latest data I could find (2012, and while things have improved a bit, it is not likely that we’d see much difference in 2014 data):

Unemployment by Sector

No matter where you look, there are plenty of job-seekers. And these data do not include those who’ve given up hope: official unemployment rates only include those actively seeking work. If you only hide 5 bones and send out 10 dogs to find them, you can be sure at least 5 dogs come back boneless. That’s what it still looks like across all sectors of our economy—far too few jobs out there. Five years into “recovery.” And with what looks like a possible slowdown coming.

(cross-posted from EconoMonitor)