Donnerstag, 5. Februar 2015

Varoufakis' Suckonomics 1001


In July 2013, a Greek Prof. of economics named Yanis (Gianis or Giannis) Varoufakis had published (together with the co-authors Stuart Holland and James K. Galbraith) the latest Version (4.0) of a paper under the title "
A Modest Proposal for Resolving the Eurozone Crisis".
In January 27, 2015, Prof. Yanis Varoufakis (
Wikipedia) has become Greece's Finance Minister in the new coalition government formed by the political parties Coalition of the Radical Left (Syriza) and the smaller right-wing-party Independent Greeks (ANEL) under Syriza Prime Minister Alexis Tsipras.
In all likelyhood, Prof. Varoufakis considers the paper to be a blueprint for his activities.


Just recently I have analyzed and denounced his "Modest Proposal" as being a cover-up for a sneaky fraud detrimental to the German (and other) taxpayers in my German-language blogpost "Großes griechisches Ehrenwort? Yanis Odysseus Varoufakis: Ein Schlitzohr wird Finanzminister".
And I'm not the only one to gain this Impression. Ricardo Cabral, (then - ?) Assistant Professor at Economics and Management Department at the University of Madeira, Portugal, commented (emphasis added):
"All of the 4 policy measures proposed have effects akin to fiscal transfers between surplus and deficit countries. It is only the case that the policies are too technical and convoluted to be perceived by the public opinion as outright fiscal transfers."
(His comment refers to an older version of the MP, but would equally apply to the latest version 4.0.)

Co-author Stuart Holland has denied this assertion.
"STUART HOLLAND’s response: (Professor Cabral’s text in quotation marks)
'All of the 4 policy measures proposed have effects akin to fiscal transfers between surplus and deficit countries.'  No: they are aimed to recycle global surpluses of which there are $2 trillion in global pension funds alone which are seeking but not gaining investment outlets",

but his denial does not convince me. Because sooner or later the whole operation would end up in massive bailouts. Credit socialism just doesn't work for any length of time: Not on the level of individual economic agents nor on the level of national states.

Here, I will not dwell on the question of honesty in any detail. Let me just point, as an example, to one self-contradictory statement (emphasis added):
"..... banks, debt and investment flows are europeanised without the need for national guarantees or fiscal transfers"
Obviously, if debt is "europeanised" the Europeans will be liable jointly and severally. Even if they do not give explicit guarantees the investors will assume those bonds to come with implicit ones.
When any such debtor goes bust bondholders of course cannot enforce redemption through legal action. However, the inherent economic necessity would compel the European nations - i. e. the European taxpayers - to pick up the tab regardless.


While nobody enjoys being duped into an accountability through fraudulent false pretences, this offense does not logically exclude the workability of Varoufakis' magic money potion.
The idea that will first come to mind when trying to assess the serviceability of the authors' suggestions is probably to follow their lead and focus on their understanding of
"
The nature of the Eurozone crisis:
The Eurozone crisis is unfolding on four interrelated domains:
Banking crisis: .....
Debt crisis: .....
Investment crisis: .....
Social crisis: .....
"
But where do these crises stem from? Are they themselves the root course of the disease, or are they, like a fever, only indicators of some disturbances buried deeply inside the operating System of the European Monetary Union? Or could it be that ultimately  the breakdown is a disfunction at the interface between monetary and real economy - worldwide?


It looks like Varoufakis himself has never systematically tried to dig deeper. His concern was (even though he says otherwise) to dig for dough for Greece. And, having purportedly found a vein of Gold with Greece's European 'friends', he thinks everything's just fine.
Note that he persistently attributes the problems to the EMU as a whole, and denies that specific circumstances in Greece (and the other affected countries) play any major role in the crisis. Varoufakis is a man with a mission. His motivation is the salvation of Europe (or so he claims). Fortunately for his own Country and a few others, he has "scientifically" determined that Europe (i. e. the EMU) can eventually only redeem itself from eternal economic Inferno by paying ransom to Greece and other countries. [Maybe it's time for another Martin Luther to rebut the sale of indulgences?]
However, on May 3, 2011 V. has made an effort to underpin his miraculous proposal, the
first version of which he and Stuart Holland had published on Nov. 16, 2010, with something like a General Theory of the (European part of the) financial and economic crisis. I'm referring here to his blogpost
"THE EURO CRISIS AS A TWIN RECYCLING PROBLEM A new rationale for the ‘Modest Proposal (*)’ – based on an a supportive letter I received from George Krimpas, Emeritus Professor at the University of Athens."

The twin recycling Problem is supposed to consist of
  • A debt recycling problem and
  • a surplus recycling problem.
 Of course, the unsustainable degree of indebtedness of the Mediterranean countries in the European Union (and of Ireland) is, at the bottom, NOT a "recycling" problem of how to BORROW money. It is a structural problem of how to EARN the money that they feel entitled to spend.

However, I will leave aside the debt situation and focus on what Varoufakis calls a "surplus recycling problem" (numbering of sentences and emphasis added):
"(1) The crux of the surplus recycling problem is a foundational asymmetry within a currency union: (2) Especially after a crisis hits, countries on the deficit side of payments suffer deflation while countries on the surplus side do not suffer inflation. (3) The problem is thus cumulative as the debt crisis forces deficit countries to adopt austerity measures of increasing savagery which, unsurprisingly, exacerbate further the surplus recycling problem – (4) the result being an increasing debt-to-GDP ratio (courtesy of the worsening debt recycling problem) and decreasing growth (courtesy of the accelerating surplus recycling problem)."


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I agree with Yanis Varoufakis that imbalances of current accounts between national economies are a problem. In a way, I personally consider them to be the cause behind the Great Recession (and also the Great Depression). However, these particular imbalances themselves are not the root cause.

On the monetary side the concomitant issue to any export surplus is a capital surplus, i. e. saving. Would the exporting countries either consume their products themselves or would they import accordingly (i. e. more) from others, the surplus would disappear. But so would the savings.
Because, under a regime of money creation through credit (being the
only sensible method to create money), any saving is someone else's debt.
A large surplus means that either demand is insufficient, because the economic agents want to save. Or the supply is inadequate, so they cannot consume. Or earning prospects are to gloomy to invest the money.

[In that respect, I agree with Varoufakis when he says, in an interview published Jan. 15, 2014 (2nd part here): "..... everybody keeps thinking about the debt crisis, but very few people are aware that the other side of the debt crisis is a glut of savings."]
This phenomenon is commonly (but not quite adequately) described as underconsumption. However, being that money can also be recycled into the real economy through investment, I prefer the term
overaccumulation. And that is what the world has seen for quite a few years now. (Whether too much money was accumulated by the rich, and/or to what extent saving for retirement has been - part of - the problem, need not be discussed here.)
For a long time, the market mechanisms have managed to suppress the
resulting demand insufficiency by what Colin Crouch has termed "privatised Keynesianism". (Fee-based original article, free follow-up paper by C. C. I Haven't read it yet, but the article "THE CRISES OF DEMOCRATIC CAPITALISM" by Wolfgang Streeck - review - is probably also pertinent. And so is the current debate about Secular Stagnation.)

But if overaccumulation is the problem, credit socialism (which is, in effect, what Varoufakis is up to) cannot provide a viable solution.  Because sooner or later the debt problem would (once again) have to be resolved. Depending on how this happens, the results would be either inflation or a further increase in taxation (or both). Considering that the governments (and most certainly the Greek government) have not managed to tax away the national excess savings, the final scenario stands out crystal clear: It will be the small folks to bear the burden: VAT or other sales taxes raised, or even an income tax hike.
The final outcome of what Mr. Varoufakis is up to (i. e. more Money for Greece) would be the same as with aid for the developing countries, which is said to "take from the poor in the rich countries to give to the rich in the poor countries".
 
Anyway: No matter whether or not you share my view on overaccumulation as a major tribulation for today's economies, let's look at the rest of the paragraph of the MP and then at Varoufakis' concrete proposals to increase investment by government intervention (on a European level).


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"austerityty measures ..... exacerbate further the surplus recycling problem"
This is plain rubbish and an offense to the economic intelligence of even a layman like me.
Austerity reduces consumption in the deficit countries, thereby lowering imports. And, ideally, shrinking demand and falling production costs instigate entrepreneurs to find new markets abroad, thereby boosting exports.
Either Prof. Yanis Varoufakis and his two fellow-authors are economic ignorants - which I don't believe.
[Addendum: In the interview quoted above V. himself concedes: "Now in countries like Spain and Italy, you can see that the current account deficit has been almost eliminated, and in some cases it has been turned into a surplus." // See also NZZ-article (in German) "Eine geschlossene Gesellschaft" by Thomas Fuster, Febr. 13, 2015: "Eine Analyse der Leistungsbilanz bestätigt den Verdacht auf anhaltend grosse Exportprobleme. Zwar dürfte Griechenland 2014 – wie schon 2013 – erneut einen Überschuss in der Leistungsbilanz verbucht haben, nachdem das entsprechende Defizit noch 2008 fast 15% des Bruttoinlandprodukts (BIP) ausgemacht hatte. Mit dynamischen Exporten hat dieser Abbau externer Ungleichgewichte aber trotz erfolgreichem Tourismusgeschäft wenig zu tun. Der Überschuss spiegelt vielmehr den Einbruch der Importe im Zug einer massiv tieferen Inlandnachfrage und Kauf-kraft. Seit Beginn der Krise im Jahr 2008 haben die Exporte von Gütern und Dienstleistungen um nur 1,5% zugelegt, während die Importe um 35% zurückgingen. Wenn der Anteil der Exporte am BIP in diesem Zeitraum dennoch gestiegen ist, dann nur aufgrund des seit 2008 um 24% eingebrochenen BIP." My summary: 'Greece had an export surplus in 2013 and probably also in 2014. But that is due to the decline in imports only (minus 35% since 2008) and not by a growth in exports (+ 1,5% since 2008)'.]  
Or Yanis Varoufakis ist not only a socialist, but also a Nationalist, and that is exactly what I hold him to be: Trying to extoll money from the partners for Greece by all means, and not afraid to lie if it seems to serve his purpose. Which is, of course, for his country to be able to continue high-level consumption without reforming what has been termed 'the last socialist economy in Europe' in ways that would reduce demand and/or preferably) increase production (and, as a precondition for an increase in exports, productivity).
So it should not be surprising that the new Greek Administration is composed of a socialist and a Nationalist party. National socialists have been around more often in history than just in Nazi Germany. Even when they are more well-meaning (paternalistic) and less aggressive than Germanys Nationalsozialisten, they are always dangerous (if not to the same extent) for their own countries and others.
The fact that he new administration has
put an end to the privatization of state property - Piräus port of Athens and other projects not does not forebode well for the future vitality of a blossoming private economy and a sustainable national economy in Greece.


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"an increasing debt-to-GDP Ratio" is not the result of austerity measures, but of government efforts to dodge saving in a shrinking economy by taking more credit. Which is obviously what Varoufakis is currently planning to do for Greece.


How is Varoufakis' surplus recycling mechanism supposed to work, and what is the likelyhood that it actually will work?
"... as things currently stand, every investment project financed and supervised by the EIB requires 50% of its cost to come from the member-state. And since the member-states that need investment most are that have the least cash to invest, the EIB is itself constrained from investing into potentially lucrative projects in the European periphery. Thus our Policy 3, which makes a simple, uncontroversial suggestion: That the 50% of project funding which so far must be sourced by means of national borrowing (by the member-states) should be funded by the ECB’s net eurobond issues, and not count as part of the member-state’s national debt. This way, the combined forces of the ECB and the EIB act as a major boost to the recycling mechanism that the eurozone is so sorely missing. Indeed, the EIB (with ECB backing) metamorphosises into the surplus recycling mechanism, the engine of growth, that the eurozone craves."
So the hard fact behind all his economic lyrics is the suggestion that European institutions should debt-finance government investment projects and that spending on these should (and could and would) be dramatically increased, if only the restriction of a 50% cost-sharing with the respective national government was removed. (If the investments were actually "lucrative", it shouldn't be a problem to find private Investors for them?)

He and his fellow authors have elaborated on their investment-ideas on p. 6 - 9 of their "Modest Proposal ...".
What stands out in that text is what is missing: There are no provisions for the allocation of the investments to the various national states.
Obviously, a trade surplus isn't going to be rectified by investing more money (even if investments were carried out in proportion to the countries' GDP) in the surplus countries. It doesn't benefit the Greek economy, when "Europe" invests money into the Berlin Airport in Germany. Quite the contrary: Investments in Germany would only deepen the rift of competitiveness between both countries. And it is rather unlikely that Greek companies would be involved on any larger scale in the construction of an airport in Berlin.

Maybe even worse (für Europe as a whole) is the fact that there is little chance of this money going into PRODUCTIVE investments:
"The EIB has a remit to invest in health, education, urban renewal, urban environment, green technology and green power generation, while the EIF both can co-finance EIB investment projects and should finance a European Venture Capital Fund .... ."
The only potentially profitable project on the list is the Venture Capital Fund. But why should it take government-like institutions to erect such a fund? If likely lucrative business ideas can be identified, private capital would probably be happy to finance those - and cash in on the returns of their investment. If private capital is unwilling to invest, the reasons for this aversion should be identified.

Not even the authors themselves call for "productive investment" but for "socially productive investment" (emphasis added). Which probably means stuff that makes people feel good (or even enhances their qualifications), but doesn't yield any (direct) monetary dividend.
There is nothing wrong with that - if the government can afford to pay for it. But it certainly is not the formula to catch up with economically more advanced countries. 
My two cents are that the authors pursue a hidden agenda: For the public, they try to give the impression of a normal businesslike investment. In reality, they know damn well that money amassed in funds of the European Investment Bank and/or the European Investment Fund would be treated as political pork by the European politicians.
And they also know that investments in "health, education, urban renewal, urban environment" do not normally supply any (direct) financial yield. In particular, Socialists like the Syriza administration would be the last ones to introduce privately paid health care or education.

Actually, I'm pretty sure that this is exactly what Varoufakis and his co-authors have in mind: More state investment, but keeping the debt from the governments' books. What they must be thinking of is the EIB to build hospitals, universities, roads and pay for urban renewal projects, collecting (extremely low) interest of a while and eventually sell the buildings to the state. (This is the only conceivable way for the EIB to raise the money needed to redeem the debt incurred to finance those investments).

So in all likelyhood the plan of economic salvation concocted by Yanis Varoufakis & his fellow-jesters is plain simple: To increase government debt without taking it on the books. And therefore, eventually, the German and other taxpayers again would have to bailout Greece, but this time indirectly by shouldering the EIB-debt. Because where would Greece (and some other countries) get the money from to pay for investments, that did not (directly and immediately) increase productivity, production and fiscal revenue?

And even if users somehow could be made to pay for such services: Hospitals, roads, urban renewals or education (in the short run) do not produce any goods that a deficit country can trade in for foreign products. (Just remember that even though the German administration flooded the eastern part of the country with "investments" of this quality after the reunification of the country, Eastern Germany still is not fiscally self-sufficient but depends on large-scale money transfers from the West.)
Therefore, Vroufakis' "investment" strategy would do nothing to mitigate trade imbalances, or to increase tax yield.


"EIB-EIF finance of an IRCP therefore does not need national guarantees or a common fiscal policy. Instead, the joint bonds can be serviced directly by the revenue streams of the EIB-EIF-funded investment projects. This can be carried out within member states and will not need fiscal transfers between them."
Certainly sound investments will supply a revenue stream. But I fail to see how any investor - private or not - could cash in on constructing a University.

Except for renting it out and eventually selling it to the government. Which, in the case of Greece, is bankrupt already.
And of course the markets would consider EU-institutions to be equipped with at least a tacit guarantee by the national governments, just like they treated he US-housing institutions Freddie Mac and Fannie Mae as government entities. So in case of bankruptcy of EIB and/or EIF the taxpayers would have to step in anyway.

"... for the IRCP to reverse the Eurozone recession and stop the de-coupling of the core from the periphery, it must be large enough to have a significant effect on the GDP of the peripheral countries."
To manage all those fantastic projects the EIB personnel would have to increase their staff manifold. This is, of course, a socialist's dream. But it would most certainly turn into a nightmare for the European taxpayers.
The abovementioned Economist Ricardo Cabral
comments on the foreseeable profitability of state (EU) bank Investments (emphasis added):
"An EU Investment Program led by the EIB and the EIF is a bad idea and is not sufficient given what is required. It is putting the lender in charge of the investment. The EIB has done that for a number of years, and their only worry is to make sure they can retreat graciously (without losses) if they make bad lending decisions, which they do far too often. They have shown little regard to the economic value of the project or the economic consequences of their lending decisions."

This is a somewhat technical criticism, based largely on the identity of lender and investor. In my opinion, this identity is not the real problem. After all, private companies can invest their own money and then, too, "lender" and investor would be identical.
Instead, I fear that a government (EU) owned bank would tend to operate like a government agency and would rather neglect the productivity and profitability of the Investments (which Ricardo Cabral also says).

"... the EIB has issued project bonds successfully since 1958, without such guarantees"
This statement is plain ridiculous. While it is probably true, the historical argument neglects the difference in size between investments that the EIB has made so far, and those that the Modest Proposal is aiming for. Plus, like I said, European financial institutions are always considered by the markets to be (implicitly) guaranteed. And Europe simply could not afford to just let them go bankrupt.

"There is a widespread presumption ..... that one cannot solve the crisis by ‘piling debt on debt’. It depends on which debt for which purpose, and at what rates. Piling up national debt at interest rates of up to seven per cent or more without recovery is suicidal. Funding inflows from global surpluses to Europe to promote economic recovery through joint EIB-EIF bonds at interest rates which could be less than two per cent is entirely sustainable."

Wrong: interest rates of even 1% are unsustainable, if the yields of the investment are lower. And even the credit itself is unsustainable, at no interest, if it does not generate an adequate revenue stream.
And piling more debt on the European Governments pretending one can escape the financial realities by simply not taking the debt on the books, is not economics: That's a childish play of - infantonomics (or crazynomics)!

 
 
It would probably be instructive to compare the various versions of the Modest Proposal.
For anybody interested in doing so, here are the links to the individual documents which I could find:
  1. The (probably) very first draught of the MP was an article by Yanis Varoufakis in the (American - undogmatic - marxist) "Monthly Review": "A Modest Proposal for Overcoming the Euro Crisis", published Nov. 5,2010. (But even then, he said: "The proposal emerged from lengthy discussions with Stuart Holland").
  2.  The Modest Proposal for the Euro, Yanis Varoufakis and Stuart Holland, Version 1.0, Nov. 16, 2010
  3. A MODEST PROPOSAL FOR OVERCOMING THE EURO CRISIS, same authors, Version 1.?, April 2011 ("This proposal was first tabled in November 2010. Since then, it has been updated on a number of occasions in response to developments within the Eurozone and comments sent to the authors by a large number of readers. The authors wish to thank them for playing an active part in seeking to effect a Gestalt shift by which a fresh perception of what is feasible may gain ground." - Nach den hier erwähnten weiteren Versionen habe ich nicht gesucht.)
  4. A MODEST PROPOSAL FOR OVERCOMING THE EURO CRISIS, Version 2.0, same authors, March 11, 2011. ("A few months ago, Stuart Holland and I tabled our Modest Proposal for Overcoming the Euro Crisis. Then we gave it a redux for the New Year. As the Crisis is deepening, and in view of the forthcoming 25th March EU Summit which, we were promised, was meant to culminate into a Comprehensive Solution for the eurozone’s woes (an unlikely turn of events), the time has come to provide a much revised and updated version of the Modest Proposal. So, here it is. Comments are actively encouraged, solicited and anticipated…".)   (I don't know why no. 2, being, it seems, the final version of 1.0, appeared at a later date than the Version 2.0.)
  5. A Modest Proposal for Resolving the Eurozone Crisis, Version 3.0, same authors, May 2012. And finally (at least for now):
  6. "A Modest Proposal for Resolving the Eurozone Crisis, Version 4.0" by Yanis Varoufakis, Stuart Holland, and James K. Galbraith, July 2013.
Also, Mr. Varoufakis has compiled an overview an his "Posts in favour (and critical) of the Modest Proposal" which will be helpful for anyone interested in a closer investigation of his ideas.
 

Addendum:
Here are some extracts from an interview "The Modest Proposal for Resolving the Euro Crisis explained" with Mr. Varoufakis conducted by Roger Strassburg and Jens Berger of NachDenkSeiten and published in the original English version on Varoufakis' blog confirm my suspicions that he is not truly interested in economic balances in Europe better Europe but lobbying for a Greece's interest to live (partly) off other taxpayers' money:

"
RS: ..... let’s just assume that the crisis was over. Is it possible for Greece to run balanced current accounts?
YV: Probably not, until and unless some fundamental change occurs in Greece’s productive matrix. So what? Is the North of England ever going to have a balanced current account vis-a-vis the rest of England? Well, it never has in the last 50 years and never will in the future. Is Arizona ever going to have a balanced current account with California? No. But who cares? There are always going to be deficit regions and surplus regions within an economic union. In Germany itself there are regions within Germany, especially in the East, that will always have a current account deficit vis-a-vis the rest of Germany. So either we want to have an economic and monetary union, or we don’t. If we do, it is the apotheosis of idiocy to expect that every region within it will be in trade balance with every other Region
."

 
In the case that V. quotes, the imbalance is mainted through transfer payments from a national government. Which also is a sort of proof, that the mechanisms V. has suggested will not accomplish this, at least not in the longer run.
Roger Strassburg touches this point by asking:
 
"
RS: The thing that’s missing, of course, with the rest of Europe is the federal government that pays the pensions and pays the food stamps and that sort of thing.
YV: That’s quite right. This what we are trying to do with our Modest Proposal. We are trying to simulate a federal government without federation and without further loss of national sovereignty
." (Emphasis added)

Meaning: 'We want your money, but we shall not allow you any say in how we spend it'.
Thanks a lot for your candor (at least here), Mr. Varoufakis!
Of course, in economics there is no free lunch and therefore no such thing as transfers of credit money without shared liabilities. (More towards the beginning of the interview V. had said: "... we decided to propose that these problems are, in a sense, Europeanized without federation, without further loss of national sovereignty, and without joint guarantees of liabilities.")
"At the moment Europe is sadly caught up in a false dilemma. On the one hand, there is the standard view that the way we are going in Europe today is leading us out of the crisis and it’s working. I don’t share that view. I think that Europe is proceeding along the lines of disintegration. The other part of the false dilemma is to say that federation is the alternative. I don’t think that is possible, and I don’t think it’s desirable, either." (Emphasis added)
Of course not: Greece wants to live under it's own standards - but at the expense of others! (OTM = Other taxpayers money.)
We insist our country to go our way:
And we're sure that those dumb Krauts will pay!

 "So the way I narrate the Modest Proposal is to say that it is proposing a third road which I like to refer to as “Decentralized Europeanization”."

So that's how you call a reality of: "All pay, no say"?

"RS: In order to sustain a current accounts deficit, it would require some transfer payments to be made, wouldn’t it?
YV: If the Greek banks stop being Greek, it would be a Godsend. And if part of the public debt is serviced by the ECB, while aggregate investment is directed by the European Investment Bank, then that creates productive capital inflows into Greece. Immediately, you can run a mild current account deficit while the government maintains a balanced Budget
."

Unsurprisingly, V. dodges the T-word. And what should make us believe that capital infows into Greece will be productive, when V. himself admits that Greece is unlikely "to run balanced current accounts  unless some fundamental change occurs in Greece’s productive Matrix"?
But then, who cares, when there are suckers dumb enough to sponor your lifestyle?
Let's tell the Krauts we've found a Hogwarts-way to fiscal happiness:
They are stupid enough to swallow that stuff!
And once we've got them on the hook, it's too late for an escape! The glorious days of antiquity will come back to us after all: And eternal slavery will be the fair fate for those barbarian taxpayers!



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Textstand vom 08.10.2015.
Für Paperblog-Leser: Die Original-Artikel in meinem Blog werden im Laufe der Zeit teilweise aktualisiert bzw. geändert.

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