Guest MINDSETTER™ Nick Cicchitelli: For Ploutus, Mt. Olympus

Saturday, August 01, 2015

Guest MINDSETTER™ Nick Cicchitelli

 

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The success of austerity as macroeconomic policy is predicated on the assumption that said austerity would build an environment that encourages investment, and in turn stimulate a national economy back to self-sustaining health. This is the IMF's general rationale in austerity contingencies. The German government's insistence, in particular, adds in some cultural differences (like German monetary policy history), the inputs of which have very different consequences to the modern Greek economy.

Defining terms: "austerity" in the Greek debt-deal context does not simply mean "tightening the purse strings." It includes necessary structural reform as one of two main categories coupled into what is meant by "forcing" this upon Greece. These include reforming and modernizing Greece's loosely enforced (and otherwise weak) tax regime, and its unsustainable public benefits system. Such reforms ought to be part of any deal. After all, for a very long time, successive Greek governments deferred necessary reforms in the interest of political greed, and instead kicked the bucket down the road because borrowing was cheap enough and failure was not imminent. This culpability is Greece's alone.

Austerity for Greece also means curbing public spending in general, including and especially: public investment as a way to stimulate the economy. Even in our American liberal-market system (note: in this context "liberal" actually means "politically very right-leaning" and "free-market"), the U.S. government intervened to the tune of $1.5 trillion in the combined stimulus and bailout when faced with a massive shortfall in the private sector, in addition to 3 rounds of quantitative easing, and debt-financed expansion of the safety net. That public investment is the reason the US is neither stagnant like Europe as a whole, nor in depression like Greece in particular. So, this 2nd main part -curbing public spending- is not a solution to anything, and is instead hurting Greek recovery. The godfather of western economics, John Maynard Keynes, argues that economic stability is achieved when the public sector picks up slack when the private sector slumps. When they both slump, the output is recession. Austerity during a private sector slump is at its core anti-Keynesian.

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The external pressure to cut spending is the culpability of international creditors, like Germany and the IMF, who are motivated by the return of their investments, and not simply the well-being of the Greek economy. I should point out that there is money set aside for investment in the deal talks, but the conditions for that are likely too little and too tight. There is no comparable expansion of the safety net, especially for the acutely un- and under- employed youth. There's no public jobs scheme vis-a-vis a stimulus. The banks will get recapitalized, but that's really about it. There is no long-term outlook for growth. So once the money is gone, all that will be left is the mountain of un-payable debt.

But the picture is bigger still: the Euro. When a country is facing recession, a central bank can aid the economy by adjusting monetary policy to make borrowing cheaper and bring liquidity to the market (stimulate economic activity), and to make exports more competitive (devalue the currency). Greece does not have the ability to tailor monetary policy to its needs at a given time, as control was handed over to the European Central Bank upon joining the Euro, sacrificing the monetary policy interests of Greece for the euro-zone. So, not only is Greece short critical tools to help itself, but the ECB's monetary policy is inherently tied to the needs of the largest  constituent economy, Germany, and not Greece. In other words, Greece has to play by the rules that benefit Germany the most, even though Greek and German economies have vastly different needs. This doesn't mean Greece didn't benefit from the Euro, but rather the system was fundamentally flawed from the beginning and continues to contribute to the poor outlook for stability. Franco-German leaders of the past wanted to emulate the "dollar-zone" of the US, without the unifying redistribution of funding that is our federal government. Well, it wouldn't work here for the smaller, poorer, less economically diverse states (like RI!), if the bigger richer ones (Germany) didn't want to pay taxes to the federal govt. That's what's happening: Germans don't want to give tax money to Greeks.

So, again, austerity as a school of thought is predicated on instilling confidence for private investment. This was the case in say, Estonia, which was ripe for investors (low debt, developing, etc.) Through all of this turmoil, what is there to make private investors confident in the overcooked, debt-ridden, tourism-dependent Greece emerging healthy? Nothing. No magic beans. So, I stand with the architect of 20th century prosperity and predict that austerity won't work, Greece won't repay it's debt, and it's just a countdown to the next crisis. Way to beat up the little guy.

 

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