Friday, 22 February 2013


There will be no blogging for a week.

Anderson on Italy

Perry Anderson had two really good articles about Italian politics in the London Review of Books a few years ago. (Here and here.) They are a bit dated now, but still among the best things I have ever read on the subject.

Your friendly failed state next door

Call me an optimist, but I don't  think anything good will come out of the elections in Italy this week end. Unlike in Greece, there is no party of any importance that says 'let's keep the Euro but loose the austerity'. That's a pity because unlike Greece Italy would probably be big enough to put some significant pressure on the rest of Europe. So, the choice is between two types of parties: one type (led by Bersani and Monti) that say 'let's keep the Euro and the austerity' and the other (Berlusconi and Grillo) that say more or less openly 'lets loose the Euro and the austerity'. Not much to look forward to. But then again no one ever said that progress was inevitable and a good part of the history of modern Italy is made up of larger and smaller failures.

Wednesday, 20 February 2013

Title inflation, Italian style

A short post script to the last post: whenever I am in Milan I go to a small cafe near the library here.  People there are very nice and always greeted me 'ciao dottore'. That's until they found out that I actually have a PhD, which is when they started to say 'ciao professore'. As I said, they're very nice and generous people. But I wonder what they will call me if I ever make professor.

Can these people save Italy?

While Italy has some serious problems to solve, here's what's making headlines in Italy at the moment. There's a new party called 'Act to stop the decline'. (A cunning choice of name by any account. After all only a tiny share of the electorate is bound to be 'pro-decline'.) Not long ago, an economist who is a member of that party--I won't bore you with names--accused an economist who is close to another party of not being a proper professor, but rather some lesser being in the pecking order of university hierarchies. So far so silly. But now, it turns out that the leader of 'Stop the decline' has lied about his degrees. Apparently, he claimed to have a master's degree from a US business school but that's not true. Now, here's a further twist. One other prominent member of the party who is also an economist (but a different one from the first) works at the business school where the party boss claimed to have done his master's degree. Recently, it occurred to this second economists that there was something fishy about the party boss's claim. After uncovering that there was no master he begged the party boss on his knees (by his own account) to publicly correct the mistake. The boss didn't and the economist published his information. After that, the party boss offered in tears to resign. Great from an opera lover's point of view, but perhaps a bit distracting form the economics bit. Was it Keynes who wrote that he was looking forward to a time when economists would become 'humble, competent people on a level with dentists'. Still a long way to go. 

Who can save Italy II

So I said that Italy needs a coordinated policy to promote innovation and investments to overhaul its economy. An obvious obstacle to this, a part from ideological ones, is that Italy has no money. Credit is hard to get as it is and an expansionary spending programme would almost certainly lead to another spike in interest rates. This is a tricky predicament, indeed. Yet, there may be ways out of it. One would be to lean more heavyly on Germany and other solvent northern European countries. (There is an acronym, GIPSIs, for the crisis countries. Why is there none for the others? Germany, Netherlands, Finland. Hmm, perhaps lack of vocals. And 'FinGerLands' sounds creepy.) They have access to very cheap credit and could easyly afford a stimulus package. Some of it could be spend in the FinGerLands and some in the GIPSIs.

Stimulus in the core would have several positive effects. (1) It would increase employment in Germany. (2) Since Germany and other core economies are already near full employment this would drive up wages in the core (3) This would lead to higher costs in the core economies and thus narrow the gap in competitiveness with the periphery. (Yes, I am saying Germany should become more like Greece.) (4) Higher wages and more employment would mean more domestic demand in Germany and hence more economic growth there. Also, Germany would become less reliant on export surpluses which may be unsustainable in the future anyway. (4) Higher costs in the core and increasing demand there would boost export prospects for the periphery country and hence get the back on a growth track. Some of the stimulus money should also be spent in the periphery countries to help with structural economic reform and improvement of infrastructure.

How would the core repay the debt incurred for the stimulus? Additional tax revenue that results from increased growth would go a long way. Perhaps one could also contemplate to bring tax rates on incomes and corporations back to where they were a few decades ago. And of course, if the core economies run a full capacity for a while this will produce some inflation that will help with paying off the debt.

Sounds too good to be true? Well, the prospect of increasing wages and rising costs will not be met with enthusiasm by employers in the core. So it would be an uphill struggle and, honestly, not one that looks winnable given the current political landscape in Germany and elsewhere.

Deserting the sinking ship

More and more people seem to loose faith in austerity. Not too soon, given the poor results that it produced now for several years in several countries. But now even Niall Ferguson is apparently against austerity. Or, rather, says that he has been against it all along.

Why the euro crisis is not over yet

Martin Wolf explains here it in today's FT.

Tuesday, 19 February 2013

Do it my way

Angela Merkel thinks that the European periphery can learn from east German experience. By that she does not mean that Greeks should drive around in funny cars and stop eating bananas. Rather she means that European crisis countries should look to the economic overhaul of east Germany after unification as an example.

The analogy is well chosen. It is hard to tell with any precision what east German productivity was in 1990, but reasonable estimates put it at one third of West German productivity. So we have a small less developed economy that was put into a currency union and free trade zone with a large more developed economy. The predictable outcome was (1) many companies in East Germany closed down (2) unemployment increased dramatically (3) many east Germans, in particular skilled workers, moved to the west (4) some west German companies moved to the east or opened factories there (often in exchange for substantial subsidies).

Can the German experience serve as a blueprint for the European crisis countries?

Probably not. There are important difference that may make it impossible to emulate this development. Perhaps the main difference is that east Germans and west Germans were both Germans. This made possible two things: (1) mass migration from east to west helped to mitigate the extent of unemployment and connected social problem. This is not possible to the same extent in the Eurozone because of the language barriers. Immigration from the south of Europe to Germany has dramatically increased, but remains far too limited to have any significant effect on unemployment in the countries of origin. Also, in the German case, migration was facilitated by the fact that many east Germans were skilled workers and that integration into west German communities posed hardly any problems. (2) Very substantial transfer payments were made from west Germany to east Germany. The so called 'Soli' is a surtax of 7.5-5.5% on income tax and some other taxes paid in west Germany to subsidize east Germany and make the transition socially more acceptable. In addition to this, transfers occurred also via unemployment insurance and in other ways. All of this was--reluctantly--accepted by west Germans based on a sentiment of national unity and solidarity. But similar bonds do not exist between European nations. The EU has done much to promote a feeling of European unity, but feelings of solidarity are simply not as strong between people in Rotterdam and Athens as there are between Hamburg and Dresden. There is nothing natural or immutable about this and, indeed, now would be the time to take European unity to a new level, but not many in Europe seem to be fond of the idea and certainly Merkel is not promoting it aggressively.

Should the German experience serve as a blueprint for the European crisis countries?

Merkel seems to believe that German unification was a success story. But if you take a look at the regional distribution of unemployment in Germany today (see below) you can still pretty well see the boundaries of the former GDR. That's more than 20 years after unification. Turning the south of Europe permanently into a de-industrialised, low output, high unemployment zone does not seem like an enticing prospect. In particular, if one considers the severe social and political problems, including the rise of right wing terrorism, that have developed in east Germany despite very substantial transfer payments which would not be available to the European periphery.

Map by Michael Sander [GFDL ( or CC-BY-SA-3.0-2.5-2.0-1.0 (], via Wikimedia Commons

It's not over, till it's over

Euro crisis fatigue has set-in in a big way. By now most people respond to articles about the possibility of a Euro break up with a spontaneous yawn. But where it matters the story is not dead. From the Wall Street Journal:

From the classics I

This will be a loose series of relevant, insightful, amusing or otherwise noteworthy quotes from great economists. This one is from Keynes who in 1930 pondered the question of what humanity would do with its freedom once it had solved the 'economic problem', i.e. was able to provide for all material wants with relative ease:

'We have been expressly evolved by nature-with all our impulses and deepest instincts for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose. 

Will this be a benefit? ... To use the language of to-day-must we not expect a general “nervous breakdown”? We already have a little experience of what I mean, a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-to-do classes, unfortunate women, many of them, who have been deprived by their wealth of their traditional tasks and occupations--who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing.'


A while ago I wrote a post about the problem that self-adjusting mechanisms of a market economy are likely to resolve a crisis like the current one, but this takes so long that in the meantime you produce a lost generation. And that's not only bad for the generation, but also for the economy. Trained engineers who are forced to flip burgers for a decade become unemployable in their profession and growth prospects are damaged in the long term. I had a vague a recollection that there's a word for that. Now I know what it is, thanks to a great article by Miller and Skidelsky in the FT. It's 'hysteresis'. Write it down, learn it and start to impress people.

Who can save Italy?

Asks the Economist. Predictably they think that only economic liberalization will do the trick. (You already know that before actually reading any article in the Economist. But it's still interesting to see how their construct their case.) Basically, the argument is that Italy's main problem is slow, extremely slow productivity growth. The solution is to let loose the forces of innovation and investment but cutting red tape and regulations.

Anyone knowing Italy shudders at the number of professions that are protected by various forms of monopoly protection. Getting a cab in Milan on a rainy day is always a challenge and when you find one the price on the meter will be exorbitant. So are retail prices in general for everything from Paracetamol to Washing machines. Structural problems add to economic stasis. Small family owned companies abound in Italy. Much like France in the 18th century, they tend to be ill managed by scions of decadent dynasties whose only qualification to run a company is that they own it.

There is little doubt that unit costs of production could be lowered dramatically by deregulation and by substituting small family run companies with larger more efficient operations. This would dramatically increase the efficiency of the Italian economy and lower prices. (It would also take away much of the charme of Italian cities. You can still buy three screws in a small hardware store in central Milan. But of course this is a highly inefficient ways of retailing screws. Once these reforms will be done, the only way to buy a screw in Milan will be to drive to the outskirts of the city and buy a box of screws in a DIY market, while the centre will be populated by international chains. But that's an argument for sentimentalists.) The crucial question is if lowering costs will lead to growth. This is not a foregone conclusion. Much of the cost cutting would come from reduced labour costs. As it is now there are two people selling three screws: one getting them and wrapping them up and the owner hanging about doing nothing but operating the cash register. After the Economist is done, I will get a package of fifty screws in the suburban DIY and the only person involved will be a low paid cashier--deregulation of the labour market being a priority of all liberal reformers in Italy--who can pass thousands of screw packages past the scanner in a day. Reduced labour costs also mean less employment and less demand. So you get your screws for less, but you also have fewer people who can afford screws. However, if deregulation triggers capital investment a part of the efficiency gains would come from the use of new technology which would also create employment. But as things are this would probably create employment in Germany because one area in which the Italian economy is weak is the production of machines tools and other high tech products. Finally, a newly competitive Italian economy could begin to run large export surpluses and grow in this way. But with economies everywhere depressed this will be difficult.

Deregulation will not work on its own. Italy needs a targeted industrial policy. Skills training and research and development needs to be actively promoted. Most likely this will have to happen outside of existing companies because small family owned companies often don't have the muscle or the ambition to innovate. New industries like renewable energies need to be implanted through an aggressive state led drive for innovation. And by the way, this would also take care of the problem of domestic demand. Large infrastructure investments and the training of new qualified personel would create employment and strengthen domestic demand.

So is there a better solution than that proposed by the Economist? Of course there is. Is it likely to be implemented? No, of course not. The reason is not that too many people read the Economist--although the pervading influence of liberal economic ideas is important in this context--or that sinister forces are blocking Italy's ascend. It's not the masons or the illuminati this time. The problem is the weakness of the Italian state and Italy's social structure. More about that soon.

Monday, 18 February 2013

More impressions from the European periphery

Seen on a lamp pole here in Milan. Perhaps lacking analytical depth but making up for that in expressiveness:

A funny thing happened on the way to the library

This morning I noticed that the Mc Donald's opposite the Prada shop in Galleria Vittorio Emanuele here in Milan has closed and will be substituted by ... a second Prada shop. Crisi, che crisi? But then I picked up this week's Economist and all looked gloomy again. More on that cognitive dissonance later when I have read the Economist story.

Wednesday, 13 February 2013

30 hour week, 1923 and 1933

A group of left leaning economists, politicians and trade unionists in Germany have called for a reduction of weekly working hours to a 30 hours week while maintaining current salaries. The reaction among employer associations was predictably muted, but more interesting is perhaps the negative reaction of most German economists. There seems to be very little awareness in the profession in Germany that the German growth model based on low costs and substantial export surpluses creates problems not only for the Euro, but also for Germany's growth prospects. While China seems to be taking steps to boost domestic consumer demand and Japan will do so, at least if it follows the advice given in the FT by Martin Wolf, (see my earlier post) German politicians and economists seem to be oblivious to the problem. Instead, Bundesbank chief Weidmann and others worry about inflation. 1923 clearly is more on their mind than 1933.

History of economics playground

Another great blog that I often read is the History of economics playground. It's written by 'by young and restless (and good looking) historians of economics'. I wonder why I am blogging here. 

1923, 1933 and all that

Via Paul Krugman I read about this post on David Glasner's 'Uneasy money' blog. The first part is about currency wars in Asia and as such related to my last posts. But most interesting is perhaps the last paragraph where Glasner's hair is rightly raised by Irwin Stelzer's argument that Hitler was brought to power by run-away inflation in Germany in the 1930s. Here's Glasner + Stelzer:

OMG! Something has gone very, very wrong here. I repeat the critical passage to make sure it sinks all the way in.
Angela Merkel has made it clear that the long unpleasantness that followed Germany’s decision to run the money presses overtime in the 1930s is still etched in Germans’ minds
I can’t tell if Stelzer’s memory has failed him, and he is misrepresenting what Mrs. Merkel believes, or if — and this is an even more frightening thought — Mrs. Merkel actually believes that Hitler came to power, because Germany ran the money presses overtime in the 1930s.
I don't have a smoking-gun quote to hand, but the argument that inflation led to the collapse of the Weimar Republic is frequently used public debates in Germany and beyond. In this sense, Stelzer is actually right. This is unfortunate since, as Glasner points out, Hitler came to power thanks to deflation not inflation. See my earlier Brüning posts here, here and here. We should not forget that economic history does not tell the full story of Hitler's ascent. But to the extent that economics mattered it was unemployment and falling wages in the 1930s that did it. Remember that Hitler's first attempt to seize power, which came in 1923 in the middle of high inflation, failed and led to his imprisonment. If, in 1933, he was more successful, this was to no small extent due to the deflationary policies of Brüning and others in the preceding years. 

Survey results

Sorry for the long silence. Pressing on with chapter five of the manuscript and also nothing much to comment on in the last days.

By the way: Mario Draghi beat Grisú hands down in terms of popularity and recognition. Only a very small demographic of people born in the 1970s in Germany and Italy seems to know Grisú at all. This is a shame because re-watching some Grisú episodes alerted me to the progressive political subtext that was completely lost on me when I watched it as a kid. German readers can read this for a more detailed discussion of Griú's politics.

Friday, 8 February 2013

Survey on draghi

Who do you think is the most famous of the Italian draghi? Is it him or him

Sorry, no time for serious blogging today. 

Thursday, 7 February 2013

Being Mario Draghi

Thanks to Reuters everyone can now look at Draghi's dashboard. Apparently this is what Draghi looks at to steer the Euro through troubled waters.

The return of the master

It's hard not to think of Keynes's comments in the last chapter of the 'General theory' when reading about what is going on in the Pacific: 'But if nations can learn to provide themselves with full employment by their domestic policy ... there need be no important economic forces calculated to set the interest of one country against that of its neighbors.'

More on 1914

Yesterday, I ended by saying that the economic decline Japan and the potential economic decline of China would only lead to an 1914 style military escalation if the two countries try to fix their economic woes by expanding beyond their borders economically or politically. But I don't think this is the case. At least not necessarily. Rather than looking for solutions abroad both countries may be trying to fix their structural economic problems at home. Maybe.

China's economic success (like that of Germany) is based on large export surpluses. See this excellent analysis. But rising wages and international resistance against China's policy to artificially depress the exchange value of its currency will make this model unsustainable. Recent news stories suggest that China--unlike Germany--is preparing for the transition to a different growth model where growth is driven more by domestic demand. In addition to the rising wages, fiscal policy seems to be moving in a more redistributive direction. Taking from the rich and from corporate profits in order to give to lower income groups will result in increased domestic demand for Chinese goods. And it will lessen the pressure to enter into international conflict, political and economic.

China seems to have learned the lessons from Japan's economic decline. But it's less certain that Japan has. In the past Japan's economic success was to a large extent based on successful export industries. While the surpluses lasted the substantial profits of Japan's industry could be invested in these sectors. Today, exports are not as strong anymore and corporate profits remain unspent. As Martin Wolf suggested in yesterday's FT, the only way out of this is to change income distribution: 'The key to a better-balanced economy is taking the vast surplus profits away from a corporate oligopoly that has proved unable to use them. Corporate financial surpluses that end up in vast fiscal liabilities must be trimmed. Let the public enjoy the income, instead.'  China seems to embark on this route but it is not clear whether Japan will. The new prime minister seems to be inclined to use un-orthodox economic policy. But whether he is ready to take on corporate interests or whether he prefers to distract the public by whipping up regional conflict remains to be seen. 

Chinese wages

A good PS to yesterday's post: David Pilling's article about rising wages in China in today's FT. 'Real wages measured in 2005 Dollars have risen 350 per cent in the past 11 years, significantly faster than in any other Asian country'.

Wednesday, 6 February 2013


If you are reading this, you may be the 300th visitor to this blog. Yay!

(At the request of some readers I reduced the font size again.)

1914 Pacific time

As in 1914, Rachman argues, there is a general nervousness and trigger happiness developing the Pacific that may lead to the small skirmishes between Japan and China developing into a full blown war. In fact he makes a double comparison in which both Japan and China look a bit like Germany 1914. 

His Japan-Germany analogy goes like this: 'Some historians argue that in 1914, the German government had concluded that it needed to fight a war as soon as possible – before it was encircled by more powerful adversaries. Similarly, some Japan-watchers worry that nationalists in the government may be tempted to confront China now – before the gap in power between the two nations grows too large, and while the US is still the dominant military force in the Pacific.' 

His China-Germany comparison is this: 'The analogy with Germany before the first world war is striking – as the adept leadership of Otto von Bismarck gave way to much clumsier political and military leadership in the years before war broke out. The German ruling elite felt similarly threatened by democratic pressures from below – and encouraged nationalism as an alternative outlet for popular sentiment. China’s leaders have also used nationalism to bolster the legitimacy of the Communist party.'

One thing that is conspicously absent from Rachman's picture is the economy. You don't have to be a full fledged Leninist to think that the economic situation of Europe had something to do with the outbreak of WWI. The seminal contribution to the debate about the causes of WWI was that of the historian Fritz Fischer. Based on forensic study of the sources, he established that Germany had actively worked to escalate European tensions that led to the outbreak of the war. But even more importantly, he showed how central economic motives were for the decision of industrial and military circles in Germany to provoke a war. Among the principal war aims was the acquisition of the steel and mining areas in Alsace and Lorraine. 

The war aims reflected an economic situation in which economic growth in most European countries had begun to be constrained by a lack of markets. For the first time since the rapid economic growth of the 19th century, and partly as a result of it, overproduction had started to become a serious problem. Overseas imperialism provided some relief, although it often failed to deliver the economic benefits that many proponents of colonialism had hoped for. Stagnating economies, increasing economic rivalry and protectionism were an important part of the historical context before 1914. 

In some ways, including economics in the picture makes Rachman's comparison even stronger. But it also requires modifications. Japan's fear to be overtaken by China is partly about military strength. But Japan on its own has long been inferior to China because it has no nuclear weapons. And if we accept that Japan is protected by American nuclear weapons then the whole argument that we are on the brink of an escalation does not make much sense because none of the governments in Bejing, Tokyo and Washington seem to be crazy enough to enter a nuclear war. The risk of a war would then only lie in the possibility of human error that becomes of course much more likely in an already tense situation. However, where Japan is really about to be overtaken by China is in economic matters. So, if we look for the sources of Japan's general sense of insecurity and increasing competition with China we should probably look to economic development. 

Similarly, China is experiencing an enormous boom. But everyone, including Chinese authorities, are aware that this export driven boom will not last forever. As more important countries are in crisis, fewer can function as an outlet for Chinese exports. In addition, China's cost advantage is being undermined by the efforts of Chinese workers to improve wages and working conditions.The recent developments at Foxcon are in many ways typical. China, too, fears economic decline and this certainly contributes to the antagonistic stance towards Japan. 

So, as pre-1914 we have a climate of economic decline, real or anticipated, that raises tensions. But if we ask whether the result may be, as in 1914, the outbreak of a war, then crucial question is, how Japan and China will try solve their respective economic problems. Will they, like Europe's powers and above all Germany, seek salvation in military expansion? I think there are good arguments to say that they have other plans. More about this tomorrow. I know, this is quite a cliff hanger, but I have to crack on with other stuff. 

Is 2013 the new 1913?

After the wave of Brüning comparisons, the latest seems to be now to compare our current predicament with the months preceding World War I. I wonder whether this reflects a gradual increase in confidence, given that WWI was perhaps marginally less catastrophic than WWII. Or is it just that journalists are broadening their search for historical metaphors. If that is the case we will not have to wait long for the first 'collapse of the Roman Empire' comparison. Oh wait, we had that already... 

On a more serious note I will now devote a number of posts to the 1914 comparison. Gideon Rachman's article in the FT about the 1914 analogy is particularly interesting if you read it in conjunction with some other recent pieces here, here and here. I won't be able to go through all of this in one go, but will deal with them on article at a time. 

(I have made the font of this blog slightly bigger. Is that better?)

Monday, 4 February 2013

Evans on Berlusconi on Mussolini

As I said, I will not discuss Berlusconi's recent comments on Mussolini because they were not mainly about economic matters. But there is a good piece about post-war attitudes to Fascism among the Italian right in the London Review of Books. So I will outsource this. It would, however, be interesting to come back to Mussolini's economic policy at some point. He is sometimes portrayed as the 'austerity fascist' as opposed to Hitler, the 'keynesian fascist'. But I wonder how good that argument really is. Some other time. Now busy with my manuscript.

Mr Anti-Austerity

I didn't mean to sound too gloomy about the discipline of economics. There are of course also people arguing against austerity who seem to be real economists. For example last week here and almost every day here.


Please make them. I can see from the page view stats and from emails that I am getting that there is a good number of people out there reading this blog. This is great. But you don't have to take my rants in silent. Use the comments function.

M. Anti-Austerité

Le Monde has a story about an impostor who fooled various media outlets in Portugal, posing as an economist with anti-austerity views. The question that comes to mind is why anyone would bother to pose as an economist today. Certainly, the failure to prevent the financial crisis and the weak recovery cannot all be blamed on economics as a discipline. Not all economists failed to the same degree and economic policy is often not written by professional economists. But advice given by economists matters and on the whole has not been very successul as of late and it will be interesting to see how the discipline emerges from this crisis in the long term.

The crisis in the 1930s led to a paradigm shift in economics. Keynes's 'General theory', Schumpeter's 'Capitalism, socialism and democracy', and Hayek's 'The road to serfdom' were all to some extent responses to this crisis and deeply altered the way we think about economics. The current crisis may lead to similar re-birth of economic. But it may also not. In many ways the current crisis resembles that of the 1930s (one of the reasons why history matters so much in the current debates) and for this reason we are mostly seeing a rehash of past debates. It's mainly Keynes vs Hayek again. But with Hayek winning the argument this time. We all are therefore to some extent participating in a major macro-economic experiment that will be very useful to future economists and economic historians. Of course even with the most interesting experiments there is often no happing ending for the guinea pigs.

Friday, 1 February 2013

Mad Men

Germany's left wing party Die Linke wants to introduce a top marginal income tax rate of 100% for annual incomes above 500,000 Euro. That's rather steep. Prepare for a wave of outrage about these mad socialists. But one should bear in mind that by historical standards this proposal is neither particularly radical, nor particularly socialist. Viewers of Mad Men will know that the top marginal income tax rate was 70% in the US in the late 60s. And that was after it had been lowered from 91% where it had been under the well known Bolshevik Dwight D. Eisenhower.

Brüning trivia

Brüning's father was apparently a pious vinegar merchant in provincial Germany and later in life Brüning jr was known to be a sour faced man and ascetic spinster...

Being Brüning. But in a good way.

I am sensing Brüning-fatigue setting in, but here's one more. Most commentators use the Brüning comparison as a way to criticize today's austerity policies. But this seems to be true mainly of the English speaking commentariat. A reader alerts me to the fact that there are more positive views of 'Brüning-esque' crisis management out there. Perhaps unsurprisingly, similar views still seem to have some currency among German professors. (Or is it professors doctors?)

There is, of course, the classical (late 1970s) argument by Prof. Borchardt according to which Brüning essentially had no choice and was ultimately right in doing what he did. Brüning got the economics right and if the political and social framework could not take the pressure, well, tough luck. Without mentioning Brüning by name, Prof. Plumpe now seems to be putting forward a rather similar view of the current economic crisis and economic crises in general. I could not find a transcript of his recent talk about the current crisis, but there is this short article here (in German) and, of course, his book.

Prof. Plumpe's main point is that economic crises are necessary processes of structural adjustment that are about as old as capitalism. Such adjustments are ultimately salutary because they are necessary for economic development. Whether or not these transformation processes turn into a crisis largely depends on the reaction of contemporaries. The problem is not falling output and increasing unemployment, but the inability of contemporaries to see all of this as economically necessary and beneficial. Instead of revolting in the streets, Greeks should be at home, patiently waiting for the benefits that economic transformation has in store for them. So far, so Schumpeterian. The great Austrian was apparently fond of referring to economic crises as a 'cold douche for capitalism': a necessary cyclical process of reinvigoration.

Two points about this:

Schumpeter might be forgiven for focussing on economic benefits and ignoring political and social risks. He was no historian and much of his writings pre-date World War II. But we cannot cut anyone writing today similar slack. In particular, if they are historians. Anyone considering today's crisis must look at the complete package, including the possibility of political collapse in the European periphery and the implications of this for European peace and stability. Political instability on a 1920s and 30s scale still seems a rather unlikely scenario. But political risks need to be part of the picture when we think about the right response to the current economic crisis. Simply telling off the masses for their ignorance about economic history won't do.

The other problem is that the masses may actually be right. There is little evidence that the current crisis is anything to do with a structural transformations. If this were the case, one would expect lots of job openings in some sectors (the new emerging ones) and unemployment in others (the old, dying ones). But this is not the case. Unemployment is across the board. An other way of thinking about this as a structural crisis would be to say un-competitive economies in the European periphery are in the process of adjusting to the cost level of Germany and other leading countries. Once this process is completed, the Euro will be out of trouble and growth will pick up. But that's wrong, too. At least partly. The Euro would be out of trouble, but increased competitiveness does not necessarily lead to growth. It does in Germany because it makes high export surpluses possible. So despite stagnating or falling real wages and hence weak domestic demand, Germany can export its way to growth. But this model cannot work for everyone. It's not more possible that all countries run export surpluses because that would require someone to have an enormous trade deficit. There is no such place at the moment. Instead, deflationary policies in the periphery are depressing local economies and will eventually lead to slowing growth in the European core. Germany's economy is already slowing down.

So if we take the 'cold douche' approach to economics we will probably have a crisis that drags out for a decade or so. See Japan. Now, if you look at this from Prof. Plumpe's olympian perspective and look at these matters in terms of graphs spanning centuries, then there is no need worry. But a ten year economic crisis is enough to produce a lost generation. That is certainly a social problem. It might also become a political one. And it's most certainly an economic one. Long periods of high unemployment mean that people loose skills or never acquire them and today, more than ever before, a skilled workforce is an important element of economic progress. Economies, like people, never recover fully from prolonged periods of crises.