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Monday, March 2, 2015

Keynesians - Stop Talking! Start Working!

I will make a note not to read articles by Prof. Paul Krugman on Fridays because they have the potential of ruining my weekend... Well, not quite, but it is certainly a test to my blood pressure when I read articles like "What Greece Won" which was published in the NYT last Friday. 

I just wish all those Keynesians like Krugman & Co. would – instead of spending their time explaining who won/lost at each stage of the negotiations – read up on Keynes’ “The economic consequences of peace”, particularly the chapter on “Germany’s capacity to pay”. I don’t remember that things like GDP, fiscal and monetary policy, primary surplus, etc. were even mentioned there. Instead, Keynes went painstakingly, industry by industry, through Germany’s economy and calculated how much Germany could produce and what it needed to produce that. I remember the cute observation that, if one wanted Germany to maximize steel production/exports, it would not be a smart idea to cut off Germany’s import capacity for those imports which it needed for steel production.

I do not tire of using the analogy that debt is the ‘derivative’ and the real economy is the ‘underlying’, and that one cannot solve the problem of the ‘underlying’ by playing around with the ‘derivative’. To me, it is high time that the learned people of Greece and elsewhere start getting busy with the ‘underlying’. If they don’t know where to start, they could start with McKinsey’s “Greece Ten Years Ahead” report of 2011. It went through industry by industry and suggested over 100 steps about how 500.000 new jobs could be created over ten years and how quite a few billions could be added to Greece’s GDP. I think Varoufakis & Co. would benefit greatly if they spent some time with down-to-earth, common sense Mid-Western Americans like Warren Buffett. Buffett would in all likelihood focus their attention swiftly on the essentials. Or he would sell his shares in Greece, Inc.

And, by the way, if Varoufakis & Co. did the above, they would quickly discover that Greece’s economic value creation capacity is far from justifying the living standards of the past and if they wanted to keep the living standards, they would rapidly have to do something about the economic value creation capacity. McKinsey recommended one set of measures. If SYRIZA doesn't like them, they should develop alternative sets of measures. But only discussing negotiation strategies and hitting the headlines of the world's media with ideas as to how to improve the world will not do anything for the economic value creation capacity of Greece!

27 comments:

  1. 1000% agreed.

    Obviously todays protagonists of Keynes see it as old fashioned to read his original publications. And this would stop their wrong conclusions...

    I stopped reading Krugman because imho it is lost time.
    H.Trickler

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    1. So true! JMK would be disturbed about the views of many of his modern followers, I'm certain. Just take the parody so many alleged "Keynesianists" make of his argument for the benefits of a stimulus in times of ecnomic downturn: In his "Grand Theory", he actually promoted good governing which is fiscally responsible! And he advocates as stimulus for an economy that is sound and stable, as a temporary measure to level economic cycles, for the benefit of the people. Not a songle one of these points can be applied to Greece: That country applied a long term stimulus during the boom years after joining the Euro, until the crash, in total violation of Keynes' principles. This stimulus created unsuatainable jobs in the retail sector, urning the economy out of balance and making it unstable. Consequentially, the stimulus that the Greek government applied in 2009, by keeping up spending on a high level, only delayed the inevitable correction of the job market and couldn't have the desired effect. You can't magically make unsustainable jobs stable by subsidizing them for one year, after all, and Keynes never claimed you can!

      And still, despite it being obvious that the economy of Greece needs political initiatives that would create a new balance, "Keynesianists" like Krugman still depend you only have to give Greece more money and its economic desease would be cured. As if making the same mistake of the early 2000s again, under conditions that haven't changed that much at all, would this time create a different outcome! It's insane.

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  2. You're going to be disappointed, Klaus, because after the extension pre-agreement (which isn't going to last long), Syriza has made a populist u-turn and has showed nothing but disdain for the underlying (the real economy).

    Syriza's latest achievements are: education public-sector hires sans exams, free electricity plus rent & food subsidies for the poor, reopening of the erstwhile government TV-station (ERT), while a major gold-mining investment is heading for cancellation.

    In short, the public-sector continues to reign supreme, the real economy is heading for the rocks, and Syriza is hellbent on more confrontation with the Europeans (only this time the stakes are raised).

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    1. And, as I just learned, the re-introduced collective bargaining already bore fruit at DEI with significant hikes in pay and benefits. Who says that everything takes such a long time in Greece???

      http://www.keeptalkinggreece.com/2015/03/02/scandal-wages-hikes-for-greeces-public-power-company-workers/

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    2. It's not something that fills me with happiness, but put it in perspective. The cost of this (and the take-home pay of individuals) is peanuts compared with the pay of bankers and other crooks. Sorry, Klaus, because I do not mean to include you in this category. But in reality, the developed world has been hijacked by criminals posing as contributors to the economy.

      Your complaints are (1) that Greece doesn't attend to the real economy; and (2) that its form of corruption does not correspond with the corruption of most of Europe and North America. I can agree with (1), but strongly disagree with (2).

      On point (1), the new government has understood correctly that nobody is interested in the real economy, and these are all political games. In the medium run, one hopes that they will attend to the sort of things that Klaus mentions -- but their immediate concerns must be to stay in power and deal with Europe. They have little time or energy to do anything that is not in the immediate or short run.

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    3. @ Xenos at 9.13
      Seldom have I read a comment as fatalistic as yours. It sounds to me like you condone parties (not only in Greece) who don't give a damn about the national interest like the real economy but only about vested interests of staying in power to fight ideological party interests. Wow!

      Regarding DEI, it's not the numbers that concern me. It's the ideology which I sense behind them. Where previous governments were cronies with the oligarchs, SYRIZA seems to want to be cronies with the unionists. Different cronies, same results.

      Go through SYRIZA's published plans (like the Thessaloniki Plan) and count how often they use expressions like 'market economy', 'private sector', 'foreign investment' and the likes of them. It took the Castro's about half a century to finally reach the conclusion that, without at least a bit of those things, there is no future for the citizens. I hope I won't live to see the day where the Castro's are more concerned about the economic well-being of their citizens than a Greek government.

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    4. @Guest(xenos)March 2, 2015 at 9:13 PM

      Not only crooks, but also those who continuously argue the way you do it also deserve an accurate denotation ^_^

      However, politeness does not allow me to write what I think.

      H.Trickler

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    5. @Klaus and Trickler: I think you need a dose of reality. Governments acquire power through elections, and maintain it through various techniques.

      There is nothing about condoning it in my post, it is a matter of political reality in all countries, although each with a different flavour. I would prefer it were not so. Personally, I agree with Klaus's post about the need for attention to the real economy.

      I am also sure that Varoufakis is as concerned about the real economy as anyone, but the government of which he is a minister has to retain power. If he suddenly quits, then we might understand that the populist lobby has got out of control.

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    6. Part A.

      Lately I got a comment back of one of the commentators in this blog: I was not an economist. who reacted here were all economists and I was stupid.
      Now I am here anyway, again, because I love Greece (you will not believe it, I am sure), and though I read the post yesterday already, I just wanted to read also the comments.
      Well....
      I would not know what to answer on all the visitor comments, huge silence has followed after reading them.

      I am completely agreeing with what Klaus Kastner writes, and what he comments on comments. I am not a banker, I am not an economist, but I am a realist, and like common sense. My brains can follow common sense. Life learned me that, and yes, I have some intelligence. Thank you mam and dad.

      I had to learn how to survive with hardly anything and yes, I had what they name now many haircuts. Not any holiday, selling the car after I became a widow, doing all with my bike, and public transport, if needed. With the few guilders I had I managed it. And was again in the plus after a while, not in the red numbers anymore. Cheap clothes, cheap everything. Not throwing anything away. While I write I am dressed in clothes bought in 2006. They are good enough to me.
      I have one pair of shoes and some boots (plastic) for when it rains. I am happy. I know by experience that it is possible to survive. My food is the minimum, I eat three times a day. Not any cake, unless I make it myself, once in a while.
      I live in Norway, and my work is volunteering work (I am 67) and I like it, so much. Much tasks to do, even painting, but all is worth it, because it offers me the possibility to be in Norway's nature, and because of my volunteering work I can borrow a car to go somewhere up in the mountains, where I cannot go to with a bike. Nature has nothing to do with materialism and does not mind how I look like or am dressed in.

      Varoufakis is a theorist. I am sure he has never had an empty wallet or bank account, and for me the reason that he cannot work with numbers, figures. But now he meets an empty country wallet. He has not any idea how to work with money. With real life. He needs time to learn that and there is no time.

      All are theorists in the Greek government, idealists, and what is worse: not knowing at all how to work with the reality of each day, and behaving even destructive.

      All the years they are there they did not do anything else than being against. Shouting, "talking", and not listening. They are filled with something that has nothing to do with being constructive, to work, to start working. They just talk. It is a fact, and instead of having used their time to prepare for a time in the government, they just went on with being against, not with searching for their own solutions for the problems. I have witnessed for years what was going on, and still. Via ERT, later only via Mega. Via Greeks in Greece.

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    7. Part B.

      If you, commentators here, can follow that way of thinking, Syriza's thinking, then it is impossible for others to reach your mind. I see it, the way too many Greeks "think", as a psychological cancer. That is hard to say and hard to read for you, but I am sure that Greece needs thousands of psychiatrists, to start working with the sick minds of too many people. This is even more important than money. If sick minds have to use money they will misuse it.

      Hard words, but in fact they have all the same symptoms as addicts to drugs. I know how it is to live with addicts. My son was addicted to drugs, and I see that what is the problem in Greece, is, that too many people are addicted to an ideology.

      That is living in a constant trip (a term used in the drugs scenery) and they do not want to get out. As long they do not want to work at their addiction, nothing can be done.

      I had to accept that. I had 50% chance that my son would survive my "No!" to his never stopping asking for more money. But the other 50% were almost killing my soul, for fear. My heart was bleeding.
      I managed it. He survived. He has a wonderful job, career. Has his own business. A family. He is clean. We have a great contact. He thanked me for it, and is showing me that, still. I notice his deep respect and love for me.

      That is why I support Schäuble's "Nein!"
      Greece needs a leader. There is not any leader in Greece.
      Greece has also excellent Greeks though. You read something about "Boroume" or "Atenistas" or "Stavros Niarchos Foundation"?
      I am sure you did not.
      They don't talk. They work. Boroume has grown explosively all over the country.Nobody needs to die for hunger. Food is available. Website: http://www.boroume.gr/

      You will consider my mind as sick, but as long I am capable to understand the people of these wonderful organisations, the politicians of the Eurogroup, (and really: Schäuble is my favorite), of those who are professors on universities, I feel good and know: my mind is healthy.
      My mind cannot follow Varoufakis. He has the same virus as those who belong to Syriza. Trojan Horse is a virus.

      Why can my mind be healthy? I learned to listen. Also to criticism! Sharp criticism. I learned to read, slowly, word by word, and to search all what I do not understand in a dictionary, in wiki, etc.
      My mind is extremely willing to learn. To develop.
      I wish you all the same: do not be a blind follower. Start thinking.

      So, yes, I agree completely with "common-sense-Kastner".
      Had to search for the word Keynesians. And more. But the red line: I can follow, and understand. All what I learn is development. One is never too old to learn. (An expresion of my very wise mother.)

      If you want to follow up a little of what I collect about "Greece" found in the digital newspapers:
      https://plus.google.com/u/0/+FondOfGreek/posts



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    8. Dear All,

      Nice Article Mr. Kastner. I have also read that article "Greece 10 Yrs Ahead" and it is truely a work of art. I have personally used and taken aspects of that article fo personal and business relative reasons. Hopefully it can pay off.

      To All,

      Trickler, Slip and Xenos. Guys. Nice discussions but i am FURIOUS!!!! DEH Pay wage hikes? New restart of ERT and have Nerit and ERT in parallel and meanwhile the property tax which was to be stopped this year 2015 will not because we are restricted by troika or bridge agreement not to make decision like this. but we can increase wages in a company which average salaryis 100% higher than the average greek.?!?!?!?!

      Syriza just lost a huge chunk of support with these actions. Instead of taking the opportunity to nail some tax evaders they are massaging ears of their core voters. no difference from ND or Pasok. Next governement please.

      I had some faith in tsipras because he is ethically and morally consceince. he wanted to get rid of the multi million euro leasings of the mps cars and 40% of his party, a radically socialistic party say they do not want to lose there car privaleages in the meantime they have 6000 euro monthly salary. Tsipras is fair his people are not. Varoufakis is fair there other are not. Samaras was good but his people were shit and same goes for karamalis. GPAP was an idiot.

      All of you can not fathom how angry many people are. In a deflationary period to give pay raises.

      I am just furious. if they continue like this and we are forced to a new snap elections by june, they will lose and bad.

      I am so angry. Working my ass off to pay taxes on time, pay larger electric bills, and pay more public tv. god knows what else.

      meanwhile they have the audacity to scream about the poor of greece.

      Disgruntlyed,

      V

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    9. I have always considered Greek society as a rather unfair social system. Those on the 'inside track' benefit unduly at the expense of those outside it.

      In the context of Greece's fiscal situation, the new benefits for DHI employees are peanuts. But they are a slap in the face of everyone who dreamed that the new government would introduce fairness as a social principle. Greece's unemployed must now be very angry when they see that those who had been protected all along are now even getting benefits. I think the KTG article which I linked voiced those feelings rather well.

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    10. Yes quite unfair.

      Even when it all started i found hitting the whole of pensioners was appalling. Anybody over 75 years old should have not have been weighed with this crisis, especially going through 2 wars, a civil war political instability and a Junta. The people are martyrs and should never had been touched.

      V

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  3. .... to add....

    i was all for energy and water to remain public companies as i believe it is product for the people and should not fall into hands of the private. even thought they had fat wages.

    now my stance has changed. privatise all. maybe leave the water company at least they are profitable and have not made any similar request of raises.

    i find this collective bargianing especilly in greece right now at this damn moment completely offesnive. they need to be kicked out immeidately. privatise all. we have no government hand strong enough to maintain public sector companies.

    V

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  4. ...so angry.....

    with such actions they had the audacity to state to the eu you that we have a growing opinion for the desire to have golden dawn or nazis. Do they not see it themselves that by makign the above 3 moves mimics what ND and Pasok did for 30 years pushing us to the Nazis type govenement? they have no common sense? they shake their finger and do the same?

    so disapointed. you believe an hope in a glimmer of hope. and then this.

    V

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    1. @V: I understand your anger and frustration. Doubtless, I would be too if I had remained in Greece. Distance gives one some detachment, not to mention the fact that very similar injustices go on here in the UK -- all related to political power and are basically anti-meritocratic abuse of a weak system.

      I hope that this will be the end of the Syriza concessions to power, and they will proceed with real changes -- not only humanitarian efforts. It needs some time, so some patience may be needed.

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  5. This article lists Syriza's latest achievements.

    http://www.capital.gr/Articles.asp?id=2243913&uid=2243913

    In short, free stuff for the poor, wage increases for semi-public-sector workers (in electricity), public-sector employment (school guards, just what Greece needs), semi-cancelling privatizations (goldmining), compulsory borrowing from OPEKEPE's reserves (I wonder how legal it is to borrow from what are basically EU funds).

    http://www.opekepe.gr/english/

    If you live in Greece and you are worried, you have every reason to be!!!

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    1. Jim you have no idea. You simply don't. You have a 20-30% of the population which is iconic, as the successful greeks living in all foreign countries.

      I have always advocated that we should support lessers within a society. I am all for it. I am even suggesting a more fair tax system which hits me harder but for what!?!?! To pay out? Especially very old people and very poor people. I can not live in a society which resembles an inner city of the USA cities i viewed growing up in the USA. It is simple not a European characteristic. I am all for moral and ethical decisions, but i can not take arrogance or selfishness nor short sightedness.

      If you even knew the half of what benefits DEI employees have you would cry. Actually any major manager at any major company has more to be jealous about a plain DEI worker.

      Greece was always like this and we are to blame. Even if that good 30% shooting stars are apart of the system. We are to blame. We were always to blame even going back to ancient times. We simply had fewer enemies.

      I want to see where this rabbit hole goes. My hope was greatly depleted today. There was hope and work. Now just work.

      So frustrated.....

      V

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  6. Yes the situation is deteriorating very fast now. Even politically.

    To quote Aristos Doxiadis: "What Greece needs is bigger businesses, more foreign investment, more experiments with new business models, and more innovation coming out of its universities. Syriza appears to be against all of that."

    But what did we expect. Unfortunately for Greece, Tsipras is a communist, and communists want the exact opposite of economic development.

    Here is another interesting acticle about Tsipras' unionist agenda:

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_28/02/2015_547740

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  7. Check this article, Klaus. It's written by Aristos Doxiadis, one of the most vocal proponents of the liberalization of the Greek economy. He describes in a very neat way why internal devaluation didn't lead to export-led growth in Greece, and why Syriza's fight against the "oligarchs" won't bring the desired results either.

    http://www.nytimes.com/2015/02/26/opinion/what-greece-needs.html?smid=tw-share&_r=1

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    1. I'm sorry, but his arguments are just political sophistry. When did ND or Pasok put forward any sort of economic policy that would push for rationalisation of the very large number of small family firms, mostly on subsistence incomes? When did any Greek political party actually do anything that would promote Greek exports?

      At a time of economic growth, as Greece had in the mid-2000s, it should be possible to engineer some restructuring. Such policy would incur costs -- both financial and political -- in order to encourage and promote rational changes in economic production and consumption. Not only was nothing done, but the EU said nothing, those who bought Greek government bonds said nothing (presumably thinking that there was no need for any change in order to safeguard their investment).

      Now that a left government has taken office, with no spare capacity for fiscal policies (if it undertakes humanitarian rescue of its own poverty-stricken citizens) and you expect it to start solving the structural problems that have beset Greece for decades? This is irrational, if not ridiculous.

      My hope is that Tsipras will start to slowly remove some of the worst problems, and open up some new avenues. I do not think it reasonable to expect any more, of a government with no experience of governance, a political party that is not very coherent ideologically, and a set of problems that is just horrendous.

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    2. Dear Jim,

      Indeed a very good and very very accurate article. Luckily i am in that 5% of large companies which are churning out exports, while investments are made. I greatly hopefully even without the help of the government, companies like mine flourish so much as to become core business exporters. It is very likely and alot of hard work but i believe these shooting star companies may signify a change. Even if we have no raises for more than 5 years now and have taken pay cuts and increased taxes it is all for the best. My problem in the future will be to pass on my knowledge to new educated kids. I wonder if there will be any here.

      Something i am jealous of Portugal. In greece we all have characteristics which symbolize us in both right and left. we only become fanatical only when there is a alterirot motive. Potami has been saying this for quite some time. All freindly eu parties must make a deicison for reforms all together and make concrete decisions together. Portugal did. We have not.

      Tsipras had invited ND to discuss but he refrained from meeting. Maybe we need to go through another bailout and round of elections to get this into our head.

      Sincerely,

      V

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  8. "The problem is that Greece needs operational, transformative changes in the short term, and a revamping of its productive base, starved of investment as it is, in the medium term. The Greek problem isn’t, as Krugman insists, a classic problem of macroeconomic policy. It’s primarily a problem of an economy rendered uncompetitive from state inefficiency and political turmoil".

    https://hbr.org/2015/02/what-greece-has-to-do-now-fix-its-economy

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    1. This seems to me a very good way of summing up the situation. Maybe one should also add the last two sentences of this article: "The Greek crisis may have abated for a while, but if its root causes are not fixed, expect it to return, soon, to rock the Eurozone. And next time around, “the Institutions” may be less accommodating."

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  9. You're not alone in your annoyance about that column. Imho it provides evidence that Krugman isn't following the news from Greece careful enough to voice any reasonable opinions on the issues. In his story he really claims that the extension deal gave the Tsipras government more financial flexibility! What utter nonsense. Everybody who paid good attention had to notice that the agreement didn't come with any payments and that the envisaged payout of 7.5 billion Euros totally depends on the Eurogroup being satisfied with the reforms passed! So, all leverage on the Troika sice, no additional leeway fro Greece at all. Krugman obviously wasn't aware of this at all. And the news of the recent days, about Greece being in very dire straits and really scraping at the bottom of the barrel now, prove that Krugman was completely wrong. I wonder if he'll show the spine to acknoledge his dire mistake.
    :-/

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  10. Greece, who incessantly demands solidarity from Europe, has with the DEI-GENOP deal, again, shown Europe a shining example. What happened with the Troika proposed minimum income (not wage)?
    Lennard

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  11. Perhaps Greece should legalise canabis and start growing it industrially. In the US canabis is the fastest growing branch. Greece should have perfect climatic and other conditions for it.

    Why not put it on Varoufakis' list for next Monday. It is less fantastic than some of the other "reforms" they are proposing.

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