Paul Krugman is a libertarian

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The German macroeconomist Rüdiger Bachmann (University of Notre Dame) on discussions with American economists, views on Greece and the political activism of Messrs. Krugman, Stiglitz & Sinn.

Mr. Bachmann, you have just attended one of the most important events for economists: the Summer Institute of the National Bureau of Economic Research (NBER) in Massachusetts. A large number of economists meet there every summer, especially, but not only, from the United States. What role did Greece play?

Officially Greece was not an issue, but of course it was discussed in the margins of the meetings. Greece is also a huge topic in the local blogs.

How did you talk about it? Is there a lot of criticism of Germany's role?

I would like to destroy an image that is cherished on both sides of the Atlantic. On the one hand there are conservative German economists and economic politicians who say: "We are fighting against American influence." On the other hand, there are left-wing American economists who say, "Why are German economists so stupid?" I want to describe the fact that there is a whole kaleidoscope of opinions on Greece and German economic policy in the United States, especially if you are talking to economists who are still working academically. There is no closed Anglo-Saxon bloc that opposes German economic policy. But of course there is criticism.

What do American economists think of a third aid program for Greece and a Grexit?

There is a lot of skepticism on both sides of the political spectrum. Many would say: A Grexit is possible, but you shouldn't discuss it too much beforehand, you have to do it. As long as you keep a Grexit in suspension as an option, nobody will invest in Greece, because after a Grexit the investment would be much cheaper. This Grexit uncertainty is likely causing massive reluctance to invest. It will also be difficult to abolish capital controls with Grexit as a permanent option. That is why there are economists who are actually not against Schäuble at all, but who think it is wrong for him to continue talking about a Grexit because this will damage Greece economically. This position is taken not only by left-wing economists, but also by more conservative-libertarian economists like John Cochrane. The fact that one probably no longer gets the possibility of a Grexit from the discussion would be an additional reason for a Grexit for me, because otherwise its possibility always hangs over Greece as the sword of Damocles.

What do you think of the conditions for further help?

There is widespread shaking of the head about the VAT hike. Why do you want to make business more difficult for the only functioning industry, tourism, with a VAT increase? That harms economic growth rather than good. Others think the VAT hike is nonsensical because Greece has had difficulties collecting taxes in the past. As you can see, one can argue against the tax increase in both Keynesian and political-economic terms.

Do American economists feel confirmed in their earlier criticism of the monetary union?

Yes. There is the attitude: "I told you so." That comes from a conservative economist like Martin Feldstein as from a leftist economist like Paul Krugman. The justification is different. The right would say: you should have built a banking union. The left would say: you should have made a fiscal union. There is widespread astonishment that it is not possible to deal with these important long-term issues.

What do you mean?

I don't know if you need a fiscal union. But, like Cochrane, I believe that the euro zone needs a common banking market.

A banking union is in the making.

But do you proceed consistently? Take the analogy with the United States. What if California goes bankrupt? Then why doesn't the whole thing fall apart? One answer is that there are no California state banks. That means, if the state of California goes bankrupt, the banks won't go bankrupt. That is different in Europe - here too the banks and the state would have to be separated more strongly. Banks would have to be forbidden from holding their own government bonds and ensure that banks hold diversified government bond portfolios over time. Quite apart from the fact that it would also fight corrupt public finance capitalism.

But the California example cannot be explained solely with the banks.

No. The Fed is not allowed to hold California government bonds, but the ECB is buying bonds from individual countries in the monetary union. One would either have to create bonds of the European Union that are bought by the ECB, or get the ECB to buy only a market portfolio of government bonds from all member states. This prevents asymmetry in monetary policy and ultimately moral hazard.

When you look at California, you have to come to the issue of transfer union, right?

In the United States, there is federal social security that ensures that the funding of benefits in California does not depend on the California state alone. Accordingly, one should see whether insurance solutions can also be found in the monetary union at the European level. But at this point the economist can only say what the economic consequences would be. The decision about transfers must be answered politically because it is about distribution problems about which the economist should not say anything normative. As a citizen, a professor can of course be against a transfer union, but as an economist he is not allowed to comment on it. I would also criticize many a conservative economist in Germany.

We will come to the moralizing economists with political agendas on both sides of the Atlantic later. Let us stick to the economic assessment of Greece a little longer. What do you think of the criticism of overly tight fiscal policy?

You really don't have to be an Arch-Keynesian to think austerity in the midst of a recession isn't a good idea. The Anglo-Saxons are simply more pragmatic and there is justified criticism of the German overemphasis on saving. This criticism is not only represented by economists like Paul Krugman and Joseph Stiglitz.

Are there any further discussions about how to deal with Greece?

Yes, there is a criticism of micromanagement, i.e. of the fact that Greece is making so many individual regulations instead of simply agreeing macroeconomic targets for the primary surplus and the current account and leaving the Greeks to decide how to achieve the targets. I shared this criticism, but I heard an interesting political-economic counter-argument about the NBER. If there are serious distribution-political conflicts in a country, this can paralyze the politicians in such a way that they would not fulfill the specified goals by themselves. In this case, micromanagement can be helpful. One often has a macro-economic and a political-economic view that contradict each other. This can be referred to as the McKinsey effect: there are companies that know exactly what to do, but you have to bring in external parties like McKinsey because you cannot decide on the solution yourself because of internal conflicts. So it may well be that Schäuble is the McKinsey man for Greece.

And you can still see the traditional one-sidedness among older economists on both sides of the Atlantic. Some American Keynesians ignore the political economy aspects, while some German traditionalists pretend they have never heard of macroeconomics.

You have to have a broad perspective. This also applies to the issue of haircut. Everyone knows that from a macroeconomic point of view there has to be a haircut for Greece at some point, no matter what you call it. And here, in the end, you have to accuse German politicians of dumbing down the people if they make such a categorical distinction between haircut and debt restructuring. Economically it is the same, and only angular lawyers construct a difference there. On the other hand, there is also understanding for Schäuble in America if he does not want to agree to a haircut from the outset so as not to give up his pressure potential right away. Serious academic economists are quite ready to appreciate the macro-economic and the political-economic perspective.

Some media like to quote so-called “top economists” for whom this is apparently too complicated.

The term “top economist” is misused. Take Giannis Varoufakis as an example, who has been celebrated by some German media as a great economist. The fact is that Varoufakis has neither published major scientific papers nor taught at a prestigious college. Varoufakis was at the University of Texas at Austin. The business school there is indeed reputable, but Varoufakis has taught at the Austin Public Policy School, which is far less academic. But German media mostly do not write about such small, if important details. Opposite me, a well-known Greek economist who taught in the USA described Varoufakis as a psychopath. Or take this open letter from Heiner Flassbeck, Thomas Piketty, Jeffrey D. Sachs, Dani Rodrik and Simon Wren Lewis to Angela Merkel. Not all of them are academically recognized experts in international finance and currency issues ...

... Well, Dani Rodrik is not exactly considered an amateur ...

… Good, but Sachs has long since withdrawn from research and Piketty benefits from cult status. And Flassbeck has never succeeded academically. I certainly share some of his arguments, but it bothers me how he wanders the country and is the only one who wants to be right together with the US economists who suit him. The rest of us already know the theoretical models he uses for arguments.

Okay, but Krugman and Stiglitz have Nobel Prizes.Aren't they top economists either?

Of course, these are top economists who have earned their Nobel Prizes. But they are top economists in certain sub-disciplines, and most of all they are political activists today. I know South American economists whom we would politically call social democrats. They are upset that Stiglitz appears at workers' congresses in Latin America and calls for a revolution there. With this, Stiglitz undermines the attempts of social democrats there to implement good institutions according to European standards.

Here in Germany there was recently a reminder of a speech by Stiglitz several years old in which he praised Venezuela's economic progress.

Yes, in the same way it is not seen everywhere in Germany that Krugman also has a political agenda - regardless of the fact that he is a very good trade economist and has written important academic papers, including on the liquidity trap. There is no denying that Krugman is a brilliant economist. But Krugman isn't just an economist, and you have to know that.

Paul Krugman criticizes, among other things, the moralizing behavior of German economists.

Yes, but there are also many American economists who think moral issues are important. For example, there is a lack of understanding of the view of Krugman and Stiglitz that Greece has a right to credit, so to speak. States have a right to levy taxes, but states have no right to credit. American economists are also of the opinion that after all the experiences from the past, the Greeks cannot be trusted. On the one hand the Greeks want money and on the other hand they abuse the lenders. As a private citizen, I cannot abuse my bank and then demand a loan from it. It's that simple. Krugman accuses the Germans of moralizing, but he moralizes himself.

What is your view on Greece?

I come back to Hans-Werner Sinn. I share many of his economic views, but in my opinion he too mixes the role of the economist with that of the political activist too much. Only, unlike Krugman, Sinn is not a left, but a conservative activist.

Where does Sinn cross the line to political activism?

When he says that Greece cannot be given another 80 billion euros. Why not? This is ultimately a political question, so I welcome the fact that he recently stood behind Clemens Fuest's Greek solos. And he exceeds it when it comes to Grexit when he says that a Grexit is the only way for Greece to recover economically.

In your opinion, what can economists say on the subject?

In my opinion, it is the task of economists to work out the best policy measures for each of the two cases - Grexit or remaining in monetary union. I think either of the two options is feasible for Greece, just as it is being done now, everyone agrees, it is not good.

Can you briefly sketch that out?

We can not only criticize what does not work, but also describe what works. Of course, a Grexit would be a major change. One would have to provide humanitarian aid and Greece would have to send funds from EU funding. In addition, a monetary policy would have to be pursued that ensures that the new Greek currency does not depreciate too much. But in the next five years Greece could recover economically thanks to higher exports and the resolved uncertainty and then the question arises whether Greece might not even become a role model for other euro countries.

Could Greece also recover economically within the euro?

Of course that would work. An admittedly radical solution would be a decree by the Greek government that halves all nominal contracts, but in euros, wages, rents, loans, etc. And then you need price controls. So you can devalue. If you like it less dirigistic: You would have to bring about an internal devaluation, for example with a temporary lowering of wage taxes and other fiscal labor costs, while at the same time announcing that VAT will increase in 5 years. Further tax cuts and red tape could stimulate private investment and promote tourism. And if you want, you can set up a public investment program. Shouldn't we spend a lot more EU money on it? That would be a good boom in Greece. I am interested in the following message: From an economic point of view, Greece can look better with and without the euro. The decision as to whether Greece stays in the euro is not only an economic one, but at least also an eminently political one.


Interview conducted by Gerald Braunberger.


Earlier contributions from the series Talks with Economists:

1. Rüdiger Bachmann (RWTH Aachen) on DSGE models in macroeconomics

2. Daron Acemoglu (MIT) on the application of his institutional economics to the euro crisis

3. Carl Christian von Weizsäcker (Max Planck Institute for Research on Collective Goods) on the justification of very low interest rates through capital theory

4. Axel Ockenfels (University of Cologne) on the limits of experimental economics

5. Raghuram Rajan (University of Chicago) on excesses of monetary policy and holistic financial market regulation

6. Thomas Piketty (Paris School of Economics) on his admiration for capitalism

7. Alvin Roth (Stanford University) on Markets as Human Artifacts

8. Richard Werner (University of Southampton) on the ECB loan purchases

Keywords: Grexit, Greece, Hans-Werner Sinn, John Cochrane, Joseph Stiglitz, Keynesianism, macroeconomics, Paul Krugman, Rüdiger Bachmann
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Talks with economists (9): "There is no Anglo-Saxon bloc against Germany"

From Gerald Braunberger

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