For what it's worth. Defending the neoclassical approach.
There is much to criticize in economics nowadays – not least that the profession focuses far too little on political issues and far too much on beating students to death with mathematics. But much current criticism of economics is based on misunderstanding and ignorance...
Another malady that economists sometimes diagnose might be called “Keynes disease.” If demand is too weak, it can lead to a sharp drop in employment (because wages and prices are rigid in the short term). The disease can be cured with injections of public, debt-financed stimulus – like giving a cardiac patient doses of nitroglycerine to keep his heart going.
Contrary to what many think, there is no fundamental bias against this medicine in mainstream economics today. But stimulus cannot be seen as a universal remedy. Many ailments that may afflict an economy are chronic, not acute, and thus call for other types of treatment. Trying Keynesian therapy to resolve, say, the structural problems currently affecting the countries of southern Europe would be like trying to cure a broken leg with heart medicine.
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Economics and Its Critics
Hans-Werner Sinn | Professor of Economics and Public Finance at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council
8 comments:
It's a battle of philosophical viewpoints now.
HW Sinn is right in that the basic problem in the Eurozone is lack of competitiveness of periphery countries relative to Germany. Keynsian stimulus in the periphery won’t cure that.
The solution is to get periphery costs down (or raise inflation in Germany). Those costs can probably be cut by dealing with the “structural” problems he refers to. But if a country (e.g. Greece) wants to maintain a bloated and inefficient public sector (one of its “structural” problems) it can perfectly well do that, and re-gain competitiveness if it’s workforce is paid a wage that reflects the country’s inefficiencies.
That's only partially true, Ralph. It is one of those economists, "all else being equal" arguments to allow for structural reforms to solve the puzzle.
I'd argue that Sinn is wrong because the external sector isn't large enough for every country in Europe to be a Germany. A population of 80 million people in Germany has to maintain a current account surplus of about 250 billion dollars annually to just keep their economy from dipping into recession. If you "structurally reform" the other countries to be more similar to Germany, they would require conservatively 3 - 4 trillion per year in financial support from the external sector per year. The external sector can't handle that. So what would happen instead is the external sector will devalue currencies to stay ahead of Europe's own devaluation (as we see happening now) to maintain market shares and financial balance. The whole process becomes very destabilizing politically, economically and financially. Intra-Eu flows become a race to the bottom as well.
It's best if countries consider what is reasonable to expect of the external sector. It is not an unlimited cookie jar or piggy bank upon which economists can draw for policies of their greatest fantasy. There are countries on the other side which respond with counter policies and force to economic or financial violence. And markets which adjust to reduce the benefits of zero-sum or negative-sum export games.
This guy's line about their being no bias against stimulus in mainstream economics is absolute horseshit.
And we dont have to even talk about the politics.
Ricardian equivalence
the centrality of monetary policy e.g. if the TSY spends more than the CB will raise rates nullifying the spending (as if raising rates, which makes the TSY spend more, can combat the TSY spending more.....is anyone else confused?)
Not issuing T-securities is inherently inflationary. How many times have we heard this garbage even the QE definitively proves that this theory is wrong
NAIRU- These jokers probably think we are close to full employment right now so of course there is no reason for stimulus. Because they ignore real wages, labor share of income, and the private debt burden on income in their analysis.
The Intergenerational budget constraint misleads everyone into being biased against deficits
Deficits crowd out private savings aka loanable funds. This dovetails with bond vigilante myths and the belief that markets are superior to sovereign govts when it comes to determining interest spending.
The whole damn thing is biased against stimulus. This guy doesnt even know his own school of economics.
Well said, Auburn. Well said.
ryan,
" So what would happen instead is the external sector will devalue currencies to stay ahead of Europe's own devaluation (as we see happening now) "
Consider that the "devaluation" is not because of a direct action by CBs or banks... of "devaluing"...
Seems to me what has to happen first is that firms take a domestic hit on sales and then look to the external sector to make up for domestic sales weakness... so they lower the price of their real goods in terms of the currency of the nation they seek to increase exports to... THEN (somehow) the banking system reacts to this and the forex rate is effected (it falls...) to reflect the short term change in real terms of trade...
IOW to say something like you hear often "the Japanese are devaluing the Yen!" or "Russia has devalued the rouble!" imo are not true/accurate statements.. that cannot be what is actually happening as these people would never do this as it would cause losses for either the CB and/or the member banks...
Banks and Central Banks are self-interested... if the exchange rate moves it is because somehow it is in the best interest of the CB or banks for this to happen...
When a firm lowers the price of its wares in a foreign nation, it is lowering the real terms of trade for its workers and shareholders... both the CBs and member banks just react to this in a typical self-interested way...
To understand this you have to "think like they do...."... which is hard for many of us who are not dominated by self-interest...
rsp,
It's a battle of philosophical viewpoints now.
Exactly.
But there is more to it than that. The euro was introduced by the eurocrats to facilitate the transition to the EU or EZ least as an economic entity in addition to a political one.
The idea was publicly rationalized as a way to overcome endemic nationalism in Europe that has chronically led to conflict. But another strong reason was to put Europe on the same footing as the US and soon China and India, and eventually Brazil and Indonesia. The EU is now the largest economy globally on its consolidated balance sheet.
I suspect that this is the background of Sinn's thinking. After all, a consolidated EU will de facto be under German leaders (and control). Probably a reason that the UK is rather standoffish and prefers the Anglo-American alliance.
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