No, Paul: OECD carping about structural reform isn’t intellectual laziness

Paul Krugman let off an angry post castigating the OECD for carping about structural reform being necessary to help solve the crisis, and at the same time poking fun at their support for austerity fiscal policies in the Euro Area.  Since structural reform is always a good thing, he thought such carping was ‘intellectually lazy’.

Well, I for one hope the OECD continues to carp about structural reform.  I take this phrase to mean things like;  privatising inefficient state monopolies;  deregulating other product and labour markets;  reforming civil service terms and conditions to conform to euro area standards;  reforming social security systems to make them affordable.

It’s not intellectually lazy to go on about this.  It’s highly pertinent.  For three reasons.

First, it’s partly the lack of such reform that made the crisis as intolerable as it was.  At least in Greece, the structural deficit was what it was because of inefficiencies in the public sector.  With a sounder public sector, Greece would have been better able to withstand a cyclical downturn.

Second, it’s partly the lack of structural reform that deters capital from flowing into the poorer afflicted periphery.  Think of Italy.  Or:  banks in the periphery can’t lend partly because bank funders figure the peripheral sovereign can’t stand behind them because of all the other things they are on the hook for [because of the lack of structural reform].

Third, in an ideal world, the euro area monetary union would operate fiscal risk-sharing and automate fiscal transfers to the periphery in the event of a bad draw for the South.  The bailouts of Ireland, Portugal and Greek were not automated, and nothing like ideal fiscal risk-sharing.  And part of the reason for that was that leaders of countries with deeper fiscal pockets knew it was a hard sell to give their electorates’ taxes over.  It is a much easier sell if those taxes are not going to subsidise foreign state companies or foreign civil services that enjoy easier terms than those set for home equivalents.  After all, if northern electorates were going to give money away for nothing, they’d probably prefer to donate it at home.  Moreover, peripheral country leaders can more easily drive through structural reform if they can explain that fiscal risk sharing is conditional on it.

Motherhood and apple pie are also good, but they aren’t part of the reason the crisis was as bad as it was, and they aren’t going to get us out of it.  [Actually, maybe not true for state-funded apple pie, if you are a Keynesian].

I’ve got much more sympathy for the austerity-fun-poking.  It would surely have been better, if politically infeasible, to have had easier fiscal policy in the South.  But then, that would have required forgiving much more of the peripheral debt, and for northern countries to have sorted out the consequent mess in their own banking systems.  And to do that, for reasons stated above, would have been too hard a sell because of, yes, a lack of structural reform.

Since peripherals ran up the debt partly because of lax regulation in northern country financial sectors, [one eg amongst many: the ECB’s treatment of all sovereign debt as equal in monetary operations], forgiving it would have had an element of fairness too, but try telling that to German voters.

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7 Responses to No, Paul: OECD carping about structural reform isn’t intellectual laziness

  1. Your points about sundry Euro periphery countries are irrelevant because the periphery versus core problem was not the point addressed by Krugman. His article is concerned with Europe as a whole. In fact he doesn’t even mention the Eurozone, so I assume he is concerned with non-Eurozone countries as well.

    His point is that while structural reform is always welcome – anytime any place – it is not SUBSTITUTE FOR adequate fiscal or monetary stimulus.

    In addition to Krugman, Bill Mitchell on his “billyblog” site has constantly drawn attention to the grotesque incompetence of the IMF and OECD. I agree with both Mitchell and Krugman.

    • Tony Yates says:

      It was the point addressed by Krugman, because he was addressing the OECD’s addressing of it, by implication. Fiscal stimulus won’t rescue economies hampered by supply side factors, including a stifling and uncertain government sector, which throttles credit supply by not being able to stand behind the banks, who then can’t get funded. Fiscal stimulus will help close the output gaps in afflicted countries. But such stimulus can’t be provided for in countries that can’t borrow, and it won’t be forthcoming without reform from potential donors. So it’s highly relevant.

  2. What makes you think supply side factors were any worse in 2009-12 than around 2005-7 during which time most economies enjoyed full employment? In other words contrary to your claim that “stimulus won’t rescue economies hampered by supply side factors..” it strikes me that a bigger boost for aggregate demand in 2005-7 would have brought unemployment down to the level it was in 2009-12.

    What “supply side factors” got significantly worse between the above two periods? None that I can think of.

    As to the idea that governments did not “stand behind banks”, we’ve seen trillions of public money thrown at private banks and Wall Street in general – to an extent that many (me included) regard as disgraceful.

    Re your claim that “stimulus can’t be provided for in countries that can’t borrow” I’m baffled. As Keynes pointed out, stimulus can be funded by either borrowed or printed money. A monetarily sovereign country can simply print in order to fund stimulus – indeed that’s exactly what has happened thanks to QE.

    As for EZ periphery countries, of course they aren’t monetarily sovereign and thus cannot print. But that wasn’t the basic point addressed by Krugman. I.e. the big EZ problems are the problems specific to common currency areas.

    As distinct from that, the EZ as a whole is monetarily sovereign, i.e. it can be regarded as being similar to the US, UK, Japan, etc.

    • Tony Yates says:

      The constriction in credit is the supply side factor that worsened during the crisis. The rise in spreads charged by banks; the rapid shrinkage of their lending to the corporate sector, the rise in investment and junk corporate bond spreads… all point to the same thing.

      I’m not commenting on whether governments should stand behind banks. I’m explaining the effect of them not doing so. There are substantial moral hazzard problems involved, and then there’s the question of the years of implicit subsidy through TBTF.

      Monetary financing would have been disastrous. Seigniorage is a tiny fraction of revenues and it would take total debasement of the currency to finance even a modest stimulus.

      • Luis Enrique says:

        “Seigniorage is a tiny fraction of revenues and it would take total debasement of the currency to finance even a modest stimulus.”

        This looks like the important claim to me, when it comes to the popular call for stimulus via monetary expansion.

        Of course you can increase the monetary base by an arbitrary amount, but if inflation does not materialise, the currency has not been debased. I could easily believe that monetary financing of government expenditure could be very large right now, without inflation materialising in the short run. But I have no idea about the longer run.

        last time I checked, MMTers respond to the idea that monetary financing today might cause inflation to spike tomorrow by saying “don’t worry, money can be removed from the economy again via taxation” – they mean running a primary surplus and giving the money to the CB to pay off the bonds that were created during the monetary expansion. Which to my mind tells us that MMTers don’t think very hard about political feasibility. I mean if it were possible to say “don’t worry, we’re going to run a massive primary surplus tomorrow” then we wouldn’t have to worry about large deficits today, in the first place.

      • Tony Yates says:

        This is another weighty and interesting topic, probably needing another post. Away from the zero bound, unless you can think of a reason why the demand for real balances increases, the increase in money base will cause a roughly proportional rise in prices. And in fact, because of the reason you cite, that such financing would lead to expectations of a repeat (after all, the reason they are pushed into it is because the government can’t borrow now. how is the economy going to be fixed such that they can so near in the future?), higher expected inflation, and a lower demand for real balances.

        At the zero bound, or in a liquidity trap when rates are expected to be zero forever, suffice it to say thing are different. But the debate was about what the ez might have done in response to the crisis in its early phases, when the ZLB was still some way off.

  3. Luis Enrique says:

    some people are going to disagree with “away from the zero bound … the increase in money base will cause a roughly proportional rise in prices.” and not just the MMT faithful, but also empiricists like Menzies Chinn:
    http://econbrowser.com/archives/2010/12/the_correlation

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