Marshall Auerback


Recent Posts by Marshall Auerback

  • Keynes Vs. Hayek: Old Ideas for a New Era

    Apr 12, 2010Marshall Auerback

    idea 150Historic economic giants still have much to teach us, argues Marshall Auerback, reporting from the Institute for New Economic Thinking's kick-off conference at Cambridge University.

    idea 150Historic economic giants still have much to teach us, argues Marshall Auerback, reporting from the Institute for New Economic Thinking's kick-off conference at Cambridge University.

    It might appear ironic to commence a conference ostensibly centered on new economic thinking with a discussion of two economists who did their greatest work more than 70 years ago. But it speaks both to the rich and varied ideas of both J.M. Keynes and F.A. Hayek, and the concomitant paucity of thought embodied in modern day economic theories, such as the "efficient market hypothesis" and "rational expectations theory", both of which took a real beating in the course of the INET panel discussions.

    The discussion of these two giants of economic thought were led by, on the one hand, Lord Robert Skidelsky, (the pre-eminent biographer of J.M. Keynes) and, on the other, Duke University's Bruce Caldwell, a leading historian of economic thought and chronicler of F.A. Hayek. Both speakers readily acknowledged that Keynes and Hayek could lay reasonable claim to predicting likely impending economic calamity, given their recognition of the fault-lines in the pre-Depression economy which made a collapse likely sooner or later.

    But the respective diagnoses of these two rivals were quite distinct and in many respects laid the groundwork for today's great debate between the Keynesians and so-called "Austrian School" of economics. That they both recognized problems, however, despite somewhat divergent perspectives, speaks to the importance of integrating credit and credit analysis into any serious macroeconomic analysis, an extraordinary omission in the post-war period, where simplistic mathematical formulae have predominated for so long.

    As Skidelsky argued, Hayek signaled in the spring of 1929 that a serious setback to trade was inevitable, since the ‘easy money' policy initiated by the US Federal Reserve Board in July 1927 had prolonged the boom for two years after it should have ended. The collapse would be due to overinvestment in securities and real estate, financed by credit creation. Keynes, in the autumn of 1928, criticized the aggressive interest rate policy of the NY Fed (which was making a concerted effort to choke off the asset boom). Savings, Keynes argued, were plentiful; there was no evidence of inflation. The danger was the opposite of the one diagnosed by Hayek. ‘If too prolonged an attempt is made to check the speculative position by dear money, it may well be that the dear money, by checking new investment, will bring about a general business depression'. (CW,xiii, 4 October 1928). For Hayek the depression was threatened by ‘investment running ahead of saving'; for Keynes by ‘saving running ahead of investment'.

    Of course, once the slump started and intensified, and predictions evolved into explanations and corresponding policy recommendations, it was clear that Keynes would win this debate, largely on the grounds that his proposals were far more politically palatable than those of Hayek. The Keynesian analysis was ultimately vindicated: It was Keynes who demonstrated that effective demand determined employment and output and if that was deficient supply would contract. Classical economists had hitherto believed unemployment occurred because real wages were too high relative to productivity and argued that cutting wages was the solution.

    Keynes noted this would further reduce aggregate demand because wages were both a cost (supply-side) and an income (demand-side). The classics assumed independence between the demand and supply sides of the economy so cutting wages would not impair the demand side. Their other line of response was that even if cutting wages caused demand to fall, it was likely that prices would also fall.

    By contrast, Hayek focused his analysis on the nature of the slump, which he saw as the inevitable consequence of the previous disease of over-expansion of credit. In Hayek's theory, recessions were the painful but necessary adjustment that returned the system back to equilibrium. His great fear was that attempts to combat the recession with expansionary policy would lead to "malinvestment" -- too many investment projects getting started that could not ultimately be sustained, in the process delaying the necessary and painful process of adjustment (as well as setting up prospects for future inflation).

    Unfortunately for him, Hayek's solution, notes Lord Skidelsky, was a political non-starter. Letting "nature take its course" was, in the words of erstwhile Hayekian ally, Lionel Robbins, ‘as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating'. In that regard, Hayek echoed the sentiments of many modern day neo-classical economists, who fundamentally believe in the self-correcting nature of markets (notably former Federal Reserve Chairman, Alan Greenspan).

    In fairness to Hayek, however, he did not fall prey to the misguided ideas of most of the neo-classical economists of his day, who paraded models that essentially always assumed full employment. The break with neoclassical thinking came with the failure of markets to resolve the persistently high unemployment during the 1930s. And Hayek himself reformulated his views in the 1940s although, as Skidelsky argued, "what kept him out of the Keynesian camp was what he saw as the inflationary consequences of a Keynesian ‘cure' for a slump, and a hatred of central planning."

    Keynesian thought has thoroughly dominated the policy front in the last couple of years. But Caldwell noted the many important lessons that Hayek's ideas gave us in regard to regulation, another major preoccupation of the INET conference. Hayek, according to Caldwell, worried about "whether regulators would have the requisite knowledge to keep up with the ever-changing ebb and flow of the market process. Entrepreneurs, including those who recognize that there is money to be made from devising ways of getting around regulations, are always forward-looking, while regulators are almost of necessity backward-looking. He also asked Juvenal's question, who is to regulate, or watch over, the regulators?"

    Which is not to say that Hayek opposed all forms of regulation. Contrary to popular caricature, he felt that such regulation had to be embedded in a complementary set of social institutions, among them a democratic polity, with strong constitutional protections of private personal activity, operating under the rule of law, according to Caldwell. Hayek viewed the economy as a complex adaptive system, and thought that when we confronted such a phenomenon, our ability to control it was, by virtue of the market's sheer complexity, severely limited.

    Which should give any of us with a policy bent some reason to pause.

    Caldwell concludes: "Hayek's words explain why progress has been so slow in economics, why very bright people can still continue to disagree about the best way forward for our economy, and why it will ever be so. The hoped for effect of this is to make us all a bit more humble about our proposals, like Keynes' dentists."

    Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.

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  • Notes from INET Conference: The Central Bank as "Deal of the Last Resort"?

    Apr 9, 2010Marshall Auerback

    the-fed-150Marshall Auerback reports from King's College, Cambridge, where the world's policy makers and thought leaders are gathered to discuss a new direction for economics.

    the-fed-150Marshall Auerback reports from King's College, Cambridge, where the world's policy makers and thought leaders are gathered to discuss a new direction for economics. Auerback is attending the inaugural conference of the Institute for New Economic Thinking, led by the Roosevelt Institute's Rob Johnson, who is also the Executive Director of INET.

    Over the last thirty years, we have steadily moved from a bank lending credit system, to one in which capital markets have become the primary form of credit intermediation. Unfortunately, our regulatory apparatus has not kept up. The result has been a series of improvisations: filling gaps in the regulatory framework via bailouts and the steady expansion of moral hazard.

    This is important because, as one of the first of the speakers at the Institute of New Economic Thinking (INET) conference, Professor Perry Mehrling, noted, the ultimate backstop implied by repeated government rescues created a set of expectations on the part of capital market participants. For any given trade in the securitized markets, there arose an assumption that an institution or individual could readily find a counterparty willing to do a trade at a price near to the last quoted price. As Mehrling noted, when the system was working, that counterparty was typically an investment bank (like Bear or Lehman) acting as a swap dealer, taking the opposite side of your trade for a fee: "They were willing to do this in part because they were committed to supporting the CDO market more generally. But they were not crazy. Ultimately they were market makers, willing to buy or sell the index at a price, but quite careful about their own net exposure."

    This meant that sustained pressure on one side of the market would be met by falling prices, and that is exactly what happened in the early stages of the crisis. The freefall happened when the failure of Lehman and AIG took a key market maker, and the key ultimate seller of insurance, out of the system. Had someone else, perhaps the government, stepped in to do what Lehman and AIG had been doing, even at a high price, the freefall could likely have been stopped in its tracks and the extent of the subsequent global financial fallout considerably mitigated.

    Mehrling's ultimate conclusion: Have the central bank become "Dealer of the Last Resort", in effect backstopping the system by being the ultimate market maker or "insurer of last resort".

    Here's the idea, which Mehrling delivered in his presentation dealing with the Anatomy of the Crisis. In essence, he proposed a modern day version of the old "Bagehot Rule"  -- lend freely, but at a high rate, in a crisis. Mehrling argued that simply floating the system with money market liquidity, which is what the Fed initially did, failed to mitigate the intensifying financial crisis, because it wasn't getting to the capital markets. That's why we need a credit insurer of last resort, to put a floor on the value of the best collateral in the system. In Mehrling's view, the 21st century equivalent of the Bagehot Rule should be: Insure freely but at a high premium.

    The Fed, in other words, should be backstopping the market for securitized products simply because the government is the only entity which can freely create new net financial assets and thereby cover the potential insurance liabilities during a crisis, in a way which AIG clearly could not.

    Now, personally, we tend to be more sympathetic to the view that instruments that create such huge systemic liabilities and instability (such as credit default swaps) should be outright banned. Higher capital ratios (as suggested by many of today's participants) capital ratio rules will not in themselves solve the problem. The system was gamed by the banks via securitization and accounting subterfuge, which suggests that optimal regulation is best achieved via regulation of the ASSET side of the bank's balance sheet, not the liability side (we received some sympathy for this view from former BIS central banker, William White, whom we had the pleasure of meeting at this conference).

    The objective should not be to create reactive buffers (or "insurance policies") when the banks' complex derivatives products begin to go bad. Rather, the activities which fail to promote public purpose should be banned outright. The whole point of regulatory capital is to ensure buffers in case of a really bad downturn. When the really bad downturn happens the buffers will be (naturally) be used. Why not ban (or heavily tax) the activities that caused the really bad downturn in the first place?

    Nonetheless we are aware that there is a distinct lack of political will to enact serious regulatory reform or impose significant legal sanctions on errant management given the contemptuous ease with which Wall Street has successfully gutted the reform bill spawned in both the Senate and House of Representatives. Mehrling's proposals might well offer the most politically achievable and effective alternative in a way that the Volcker proposals, for example, do not (largely because Volcker does not even touch the issue of securitization).

    If securitization is the problem, argues Mehrling, then insurance is another viable policy response. The financial system did insurance wrong during the run-up, and as a consequence we got an unsustainable boom and a nearly unstoppable freefall when the bubble burst largely because the "premiums" charged for the insurance via AIG were absurdly low in relation to the risks being undertaken. As Mehrling noted when we spoke to him: "If AIG is selling you systemic risk insurance for 15 basis points, that price is too low. Charging a price closer to a reasonable rate prevents people from creating financial catastrophes."

    But if we do insurance right, we can make securitization functional again, as well as deterring outright dangerous speculation by making the "premium" on such activities to be so high as to be uninsurable. It might not be ideal, but it's far less disruptive to the existing financial plumbing and could well work more successfully than what we have today. And in contrast to insurance for "Acts of God", the right sort of prices established by the Fed as "dealer of last resort" could well prevent an earthquake in the way that our seismologists cannot.

    Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.

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  • Greece and the EuroZone: Angie, Ain't it Time to Say Goodbye?

    Mar 30, 2010Marshall Auerback

    greek-flag-150Time for Greece to exit the Eurozone? Marshall Auerback argues that as painful as it might be, the alternative of wage-cutting is worse.

    greek-flag-150Time for Greece to exit the Eurozone? Marshall Auerback argues that as painful as it might be, the alternative of wage-cutting is worse.

    Arthur Conan Doyle's literary creation, Sherlock Holmes, once solved a murder by noting the dog that didn't bark. It doesn't take Holmes's ingenuity to see that the plan on offer for Greece is clearly a rescue package which doesn't rescue. It's a dog's breakfast.

    Greece indeed is being offered a financial aid package of around 22 billion euro, but no funding will be made available until the country fails to find funding elsewhere, entirely obviating the point of the bailout. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity. As George Friedman of Stratfor has noted, "That is akin to offering a homeowner, who is about to default on a mortgage, a refinancing offer that equals or increases his mortgage rates above the rate he already cannot pay."

    This makes no sense at all, of course. In reality, it's a statement that says Greece is on its own. It means that the EMU nations will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.

    So much for European solidarity. Even worse, German Chancellor, Angela Merkel has managed to secure the backing of France for her proposal for a joint International Monetary Fund and bilateral aid package from euro-zone countries should Greece need help, which is a shame, given that recent remarks by French Finance Minister Christine Lagarde suggested that Paris better understood the nature of the current crisis.

    An interesting question which has hitherto been unanswered by the mainstream media: why did the Greek debt crisis erupt with such sudden ferocity in the past month or so? As many observers have noted, if these countries had their own national currencies, they could allow their currencies to float, which would potentially allow some stimulus via the external sector. More significantly, they are unable to use the expansionary fiscal policies that would help pull their economies out of recession. Of course, both France and Germany also violated these rules and were never punished for their transgressions. Indeed, the selective applications of the rule in EMU have made it more apparent that this is nothing more than a liquidationist gambit on the part of Berlin and now, it appears, Paris.

    A liquidationist gambit is the removal, by power, of government from the society. Liquidation occurs when society has ceased to be a center of power, and has become a center of weakness. It therefore becomes far more prone to corporate predation. It does not mean that government becomes either smaller or less intrusive, but that government's traditional role of mobilizing resources for broader public purpose is impaired. These are some of the instruments which are characteristic of liquidation gambits:

    1. Looting

    2. Corporatism and cartelization

    3. Brow-beating (societal interest above self interest, power as power, cooptation and betrayal) particularly via manufactured bankrupcties

    4. Shams and accounting frauds

    The unseemly side of the Franco-German power play came to the fore last week: ECB President Jean-Claude Trichet ostensibly took some pressure off Greece by extending emergency lending rules, saying its bonds won't be cut off from ECB refinancing operations next year in case Moody's Investors Service lowers its rating to a level comparable with other companies. Of course, this occurred only after the Greeks cried "Uncle".

    Why were these lending rules threatened to be removed in the first place? This has never been adequately explored. Trichet's statements marked a reversal for the ECB, which said in January that it wouldn't soften its collateral policy for the sake of a single country. The bank was scheduled to reintroduce pre-crisis rules at the end of 2010.

    This basically confirmed my earlier suspicions that this entire crisis was triggered by the ECB at the behest of the Germans. The ECB closed the lending window to Greece, which had been dealing with the inherent operational constraints of the EMU by buying Greek government debt, repo-ing it to ECB, and then taking the reserves from that and buying more government debt. The Germans surely took offense to that, since it is Weimar 2.0 from their paranoid perspective. Ireland has also been using this loophole. Of course, that Germany and France were serial violators of these EMU imposed constraints (when they routinely ran budget deficits in excess of 3% of GDP) never seemed exorcise the President of the ECB to the same degree.

    Given the loss of Greece's independent currency creating function, the repo mechanism was likely the only way to get "vertical money" into Greece, once ECB stopped expanding its balance sheet as the crisis died down. So various European central bankers started mentioning in front of microphones that ECB rule waiver would be up at year end, (the one that lets ECB hold and repo lower quality rated euro zone government debt) and, presto, a fully-fledged crisis emerges in Greece.

    How convenient, especially as it finally gave Berlin the leverage to fully impose its version of hair shirt economics on those allegedly lazy southern Mediterranean scroungers. Left conveniently unstated is the idea that the longer the PIIGS are forced to wallow in stagnant growth, the more persistent will be the very budget deficits and the larger the public debt to GDP ratios for which they are now being punished. It's akin to someone having a high temperature because he/she is suffering from influenza and therefore denying that person medicine on those grounds. Trying to work against the automatic stabilizers with austerity programs will be futile unless you start dismantling some of the automatic capacity, which gives rise to these stabilizers.

    Which is exactly what is happening at present. As Bill Mitchell has noted:

    "European countries have stronger automatic stabilisers than most other nations because they have historically given better protection to their workers and retirees etc. The push for austerity is seeking to undermine these provisions in part and in my view that is one of the hidden agendas in all of this."

    We would agree with Mitchell and go further by noting the hypocritical nature of the cuts demanded here. As is the case in the US, fiscal austerity seems only to apply when dealing with "wasteful" social spending, because at the same time France and Germany were imposing harsh austerity conditions on the Greeks in exchange for their "support", Berlin and Paris are using the leverage created by the debt crisis to force Athens to buy their weaponry and warplanes even as they urge those "profligate" Greeks to cut public spending and curb its budget deficit. France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft. Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis, according to The Economic Times.

    Talk about gunboat "diplomacy"! The Germans like to argue that nations such as Greece, Portugal, Spain, Ireland and Italy blew the opportunity that interest rates converging down gave them to get labor productivity up with new investment. In Berlin's eyes, it is all their fault they can't "achtung baby" and get their lazy work forces in line, with lower unit labor costs, like the Germans themselves managed after 7 years of deflating their own country into the ground following on from reunification (of course, this conveniently in the days before the creation of the Stability and Growth Pact).

    Surely there was a better way? Rather than the austerity cold bath to break the back of labor and induce a private income deflation with a decidedly Fisherian debt deflation cast to it, would it not be better for current account countries to reinvest the surpluses in the deficit nations in the form of direct foreign investment, or PIIGS government bonds directed solely at public investment that will improve productivity in periphery and have ripple effects on private investment, or run it through the European Investment Bank?

    Or the creation of a supranational authority, but not one which replicates the austerity ethos embodied in the Stability and Growth Pact -- rather one which emphasizes the principle that the only fiscally sustainable policy is one that promotes full employment. As we've said before, this could be done via a Government Job Guarantee program. We would need a supranational authority which is geared toward a full employment goal. Such a program would potentially be even more attractive in Europe, given that minimum wages and income support packages are far more generous in than in the US, consequently leaving less scope to use the JG program as a means to replace a strong social welfare benefits model with some form of indentured slavery, which is something one could potentially envisage developing in the US.

    Acknowledging that crony capitalist politicians do have this proclivity toward supporting corporate predation and wasteful spending and giving goodies to their campaign contributors, a genuine Job Guarantee Program that automatically adjusts to insure the private sector can actually realize its desired net nominal savings position largely frees the system from political parasites while increasing the freedom of the private sector to achieve its goals. And it is consistent with the idea of re-employng the country via, say, green tech initiatives.

    If the Franco-German axis proves resistant to this idea, then it might be time for the Greeks, Portuguese, Italians, Spanish, Irish, etc., to send a different message to Chancellor Angela Merkel. To quote those noted political philosophers, Keith Richards and Mick Jagger, "Angie...ain't it time to say goodbye?"

    An exit from the euro zone would clearly create a short term problem because the PIIGS nations that wanted to exit would have to deal with a foreign currency debt burden. It is unclear how the transfers back into the central banking system from the ECB noted above would serve to offset the "euro exposure" upon exit. And there is also likely to be collateral damage within the remaining EMU nations' banking systems, given the amount of PIIGS debt that they likely hold. But ultimately as part of a painful adjustment process it might require the nation to default which could manifest as a negotiated settlement where the creditors accepted the local currency (or nothing). It would be painful and messy. But a long, drawn-out process of wage cutting is the other way and that will have to be a decade-long adjustment. Far more costly, other words, in the long run. And, as Keynes, noted insightfully, in the long run, we're all dead.

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  • Obamacare: A Health Insurance Subsidy, Not Health Care Reform

    Mar 26, 2010Marshall Auerback

    doctor-200Serious reform or status quo? Marshall Auerback warns that Obamacare dangerously expands the role of the health insurance industry.

    doctor-200Serious reform or status quo? Marshall Auerback warns that Obamacare dangerously expands the role of the health insurance industry.

    The healthcare legislation is important politically since President Obama now looks suddenly like a "winner". But will it actually achieve the objective of improving the nation's health care? Yes, more people will get INSURANCE. Will they actually get more health care paid for?

    Not necessarily. We've had a bailout for bankers and now the principle seems to be extended to the insurance industry. As Randy Wray and I discussed in a recent paper, the health care bill just signed into law entrenches the centrality of private health insurance companies and contain no serious proposals to limit costs. More people will get hit with deductions, co-pays, annual limits (for several more years), exclusions, out of pocket expenses. This will ensure that health CARE remains too expensive to actually take advantage of their new INSURANCE. And many currently insured people are going to get higher taxes. Premiums will rise.

    Health insurance is the primary payment mechanism not just for expenses that are unexpected and large, but for nearly all health-care expenses. It's akin to going to your local grocery store, buying food, submitting the bill to a 3rd party who reviews it, reimburses the grocer for part of the cost, and then extracts a 13% charge from you for the privilege of scrutinizing the bill in the first place.

    The "reform" introduced by this bill largely promotes the status quo by pulling more people into an expensive health care system that is managed and funded by private insurers with no countervailing government option. Given that over half of all household bankruptcies are due to health care costs, creating mandates to force people to turn over an even larger portion of their income to insurance companies will further erode household finances and exacerbate the problem of declining incomes. It's the Wall Street bailout principle extended to the health insurance industry.

    Our progressive allies have criticized us for drawing attention to these uncomfortable truths and failing to celebrate the President's great social triumph. Yes, it may well have been catastrophic had the bill not passed, as it probably would have emboldened the radical forces of the right and torpedoed any hope of further significant reform legislation of any kind (which we desperately need in areas as diverse as financial reform to employment policy).

    But the "victory", such as it is, comes at the cost of a huge price subsidy to private health insurers. Our new health care reform is essentially the Massachusetts plan writ large. Robert Prasch, a professor of economics of Middlebury College and a long-time resident of Massachusetts, had this to say of his state's plan:

    [A]ffordability] does not come from controlling costs, but by shifting them. Shift to whom? A hallmark of the Heritage/Romney plan is that no change of the distribution of income is to occur with the financing of this plan. NONE. Rather, funding is to be from three sources --- those with supposedly "Cadillac" plans, those who have "opted out' because of the laughably high cost of coverage relative to their own risks, and to the state general fund...In light of state budget shortfalls, it is no surprise that the latter source is declining quickly, and tens of thousands of Mass residents have ALREADY lost their subsidies (this trend will certainly occur on Capitol Hill over the next several years as 'deficit mania" kicks in). So, get this, as your income declines and your house is repossessed, the cost of your health care rises with higher premiums AND lower subsidies. But, make no mistake, even as the subsidies decline, the mandate will stay -- why should the big companies give up this huge windfall of unchecked access to the wages of the low paid?

    Professor Prasch notes that health insurers were losing premiums because employers were dropping coverage. This happened in part because they could not compete, since no country in the western world uses private insurance exclusively to provide health care. Healthy individuals were dropping because no reasonable calculation could show insurance to be good value for the money.

    Why is this? Because the economics of private health insurance consists of marketing to people who are relatively unlikely to need care health, whilst avoiding selling it to those are more prone to get sick. Of course, the opposite applies to a potential consumer of health care. Healthy individuals do not want to buy health insurance and sick people pay too much on the basis of what the insurance industry considers to be actuarially sound principles.

    What about insurance for unforeseeable events, so-called "Acts of God"? Almost by definition, these events are not insurable. In almost any bargaining situation, you never want to get to a place where something is most valuable to you at the same exact moment as it is least likely someone will pay it out. The cost of insuring one's house after a major earthquake or flood is likely to be prohibitive. You don't want to pay the price likely to be charged, nor does the insurer doesn't want to provide it at anything like an affordable rate. The objective is not to pay out.

    Or consider an even more pertinent example suggested by my ND20 colleague Mike Konczal:

    Can you even imagine a universe where you could call your health insurance and say ‘I think I'll be sick next month -- can you show me how you are putting aside money to make sure you'll cover my illness?' If anything you'd be worried they'd start digging into you right then for pre-existing illness and other reasons to kick your claims.

    Any real reform which cuts costs would be far less profitable. So government has, in effect, made a grand bargain with the insurance companies. Force healthy people to pay premiums. Yes, they knew there would be a trade-off; they'd have to take some unhealthy people. But, contrary to the cheerleaders for Obamacare, giving these people insurance via subsidization on the part of the healthy part of the population is not synonymous with paying directly for HEALTH CARE. As anybody who has had regular experience with a health insurance company can attest, read the fine print of the policy. It doesn't follow that you'll get the health care provision you assumed you would receive when you were paying those expensive monthly health insurance premiums.

    Consider a recent example. Aflac offers a one-time payment program for breast cancer. Does this mean that a patient would receive supplemental payments to cover the costs of cancer treatment in the event that the existing plan would not cover everything? No, it doesn't.  The person concerned gets a one-time payout of $X if he/she is diagnosed with cervical cancer, $Y if he/she gets breast cancer, $Z for pancreatic cancer, etc. One wonders who is actually writing these policies and what sort of ingenious Wall Street engineering is behind it.

    We will need to reduce, rather than expand, the role of insurance. Nutrition, exercise, education, diet and public safety may now be more important than care in producing further advances in longevity and quality of life. Expanded health care provision is a worthwhile and genuine health care reform. We want to ensure that the key components of a civilized life -- including health care -- are available to all, regardless of their money income. Unfortunately, Obamacare does nothing to help achieve this objective.

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  • Britain Not Part of Any Greek Tragedy

    Mar 19, 2010Marshall Auerback

    british-flag-150Marshall Auerback examines Germany's motives and misreadings in a recent critique of the state of Britain's public finances.

    british-flag-150Marshall Auerback examines Germany's motives and misreadings in a recent critique of the state of Britain's public finances.

    They certainly know what "schadenfreude" means in Germany. But the attempt by the German paper, Der Spiegel, to link the UK to the travails of Greece, takes the concept to a malicious and irrational extreme:

    The British pound is tottering. The economy finds itself in its worst crisis since 1931, and the country came within a hair's breadth of a deep recession. Speculators are betting against an upturn. Instability in the banking sector has had a more severe impact on government finances in Great Britain than in other industrialized countries. London's budget deficit will amount to £186 billion (€205 billion, or $280 billion) this year -- fully 12.9 percent of gross domestic product.

    Sounds pretty, grim, especially given that Britain's budget deficit is even higher than that of the "corrupt" Greeks, whom the Germans also seem so intent on abusing in print and punishing for their alleged fiscal profligacy.

    But the article itself is rife with intellectual dishonesty. You cannot mindlessly conflate EMU states -- Germany included -- which operate with no real fiscal authority as sovereign states in the full sense -- with countries, such as the United Kingdom, which fortunately has a government with currency issuing monopolies operating under flexible exchange rates (even though the British haven't quite figured it out). And, as strange as it may sound, public sector profligacy at this time is preferable to Germanic style prudence, because as the private sector's spending and borrowing go into hibernation, government borrowing must expand significantly to compensate. Even the French Finance Minister, Christine Lagarde, seems to understand that fact  (and is taking heat from her German "allies" as a result). Her sin? She had the temerity to suggest that Berlin should consider boosting domestic demand to help deficit countries regain competitiveness and sort out their public finances. Noting that "it takes two to tango", Lagarde suggested that an expansionary fiscal policy had a role to play here, not simply "enforcing deficit principles".

    Of course, that's harder to do in the euro zone, given the insane constraints put forward as a condition of euro entry. As a consequence of these rules, the EMU nations cannot even run their own region properly. They have established a system which has consistently drained aggregate demand and brought increasingly high levels of unemployment to bear on their respective populations. In the words of Bill Mitchell:

    The rules that the EU made up and then imposed on the EMU via the Maastricht Treaty's Stability and Growth Pact were not based on any coherent models of fiscal sustainability or variations that might be encountered in these aggregates during a swing in the business cycle. The rules are biased towards high unemployment and stagnant growth of the sort that has bedeviled Europe for years.

    Having conspicuously failed to deliver prosperity to their own countrymen, the Germans now see fit to lecture the UK (after taking out the Greeks, of course) on the grounds of Britain's "crass Keynesianism" (in the words of Axel Weber, the President of the German Bundesbank).

    There is no question that the UK has some unique features which make it more than just another casualty of the global credit crunch. It foolishly leveraged its growth strategy to the growth in financial services and is now paying the price for that misconceived policy, as the industry inevitably contracts and restructures as a percentage of GDP. This structural headwind will no doubt force the UK authorities to adopt an even more aggressive fiscal posture than would normally be the case. This is politically problematic, given that the vast majority of the UK's policy makers (and the chattering classes in the media) still cling to the prevailing deficit hysteria now taking hold all over the world. But the reality is that the UK has considerably greater fiscal latitude of action than any of the euro zone countries, including Germany.

    Let's go back to first principles: In a country with a currency that is not convertible upon demand into anything other than itself (no gold "backing", no fixed exchange rate), the government can never run out of money to spend, nor does it need to acquire money from the private sector in order to spend. This does not mean the government doesn't face the risk of inflation, currency depreciation, or capital flight as a result of shifting private sector portfolio preferences. But the budget constraint on the government, the monopoly supplier of currency, is different than what most have been taught from classical economics, which is largely predicated on the notion of a now non-existent gold standard. The UK Treasury cuts you a benefits check, your check account gets credited, and then some reserves get moved around on the Bank of England's balance sheet and on bank balance sheets to enable the central bank (in this case, the Bank of England) to hit its interest rate target. If anything, some inflation would probably be a good thing right now, given the prevailing high levels of private sector debt and the deflationary risk that PRIVATE debt represents because of the natural constraints against income and assets which operate in the absence of the ability to tax and create currency.

    Unlike Germany, or any other EMU nation, there is no notion of "national solvency" that applies here, so the idea that the UK should follow Greece down the road to national suicide reflects nothing more than the traditional German predisposition to sado-monetarism and deficit reduction fetishism. A commitment to close the deficit is also what doomed Japan throughout most of the 1990s and 2000s, when foolish premature attempts at "fiscal consolidation" actually increased budget deficits by deflating incipient economic activity. Why would you tighten fiscal policy when there is anemic private demand and unemployment is still high?

    Remember Accounting 101. It is the reversal of trade deficits and the increase in fiscal deficits, which gets a country to an increase in net private saving, ASSUMING NO STUPID SELF IMPOSED CONSTRAINTS along the lines proposed by Germany under the Stability and Growth Pact (which should be re-christened the "Instability and Non-Growth Pact"). Ideally, we want the deficits to be achieved in a good way: not with automatic stabilizers driving the budget into deficit because unemployment is rising and tax revenue is falling as private demand falters, but one in which a government uses discretionary fiscal policy to ensure that demand is sufficient to support high levels of employment and private saving. That in turn will stabilize growth and improve the deficit picture. Once this is achieved, any notions of national insolvency (or more "Greek tragedies") should go out the window.

    The UK can do this, even if its policy makers fail to recognize this. But not in the eyes of Der Spiegel, which warns that "tough times are ahead for the United Kingdom, so tough, in fact, that none of the parties has dared to say out loud what many in their ranks already know. At a minimum, Britons can look forward to higher taxes and fees." And much lower growth if that prescription is followed.

    We suspect that many in Germany and the rest of Europe understand this. So what other motivations are at work here? Clearly, calling attention to the state of Britain's public finances and drawing specious comparisons to Greece in effect invites speculative capital to take its collective eye off the euro zone and focus it on the UK. Given that the alleged "Greek solution" proposed recently by the European Commission does nothing to resolve the country's underlying problems, it behooves the euro zone countries to draw attention elsewhere before their collective resolve to defend their currency union comes under attack again.

    And heaven forbid that the UK was actually successful (admittedly unlikely today, given the paucity of British political leaders who truly understand how modern money actually works). If Her Majesty's Government spending actually managed to conduct fiscal policy in a manner which supported higher levels of employment and a more equitable transfers of national income (via, for example, a government Job Guarantee program) then what would be the response in the euro zone? Wouldn't this cause its citizens to query what sort of bogus economic "expertise" that has been fed to them from their technocratic elites over the past two decades? The same sort of neo-liberal pap fed to the US courtesy of groups such as the Concord Coalition.

    No question that public spending should be carefully mobilized to ensure that it is consonant with national purpose (not corporate cronyism). But the idea perpetuated by Der Spiegel that the government is somehow constrained by some self imposed rules with no reference to the underlying economy is comedy worthy of a Brechtian farce. Unfortunately, this particular German joke is no laughing matter.

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