Saturday, June 27, 2015

Greece: We've Seen This Before

One thing cannot be emphasized strongly about the Greek economic crisis.  It is nothing new.  We have been there, done that many times before.  Paul Krugman likes talking about how Europe went through the same thing in the 1930's, Asia in the 1990's, Latin America at the turn of the millennium, and now we are back full circle to Europe again.  He always seems to leave out Latin America in the 1980's.

I remember that well, and it looks remarkably like what is happening now.  Debt-strapped countries asked to re-finance their loans.  The IMF agreed to fund them, on condition that the countries impose harsh austerity and squeeze their domestic populations.  The problems were blamed on the country living beyond its means.  As food subsidies were cut off, hardship multiplied, unemployment surged, and economies shrank, the IMF insisted that the only problem was that countries hadn't suffered enough, that they were continuing to live beyond their means, and that they needed to give higher priority to foreign creditors and less to their domestic populations.  And Conventional Wisdom all solemnly nodded along and agreed.  One Peruvian politician complained that if they cut consumption by strangling one person out of ten, the IMF would probably applaud.  Stories abounded about how austerity was about to turn Latin American economies around any day now.  A country in severe recession, suffering mass unemployment, shredding its meager safety net and seeing its public health system dismantled would be told that its efforts were finally paying off because borrowing costs were down.  Any suggest of putting the interest of the domestic population ahead of foreign creditors was denounced as irresponsible populism which could only be assuaged by harsher measures against the domestic population to assure foreign creditors of the country's sincerity.

I am honestly not clear how conditions finally improved.  But in the 1990's attention turned to Eastern Europe.  There, countries were urged to shut down as much of their economies as possible as quickly as possible on the theory that the more of their economies they destroyed, the sooner something better would take its place.  Any suggestion of employing less drastic methods were dismissed as mere wishful thinking.

But the most extreme version of this I recall was an article in the Christian Science Monitor (very much the voice of Conventional Wisdom).  In Russia, the currency had broken down to the point that people were operating on a barter system.  Coal miners were working twelve months a year and only being paid for two.  Boot factories were paying their workers in boots instead of in cash.  And so forth.  The Monitor tut-tutted and wrung its hands, saying that all this payment in kind was really a form of disguised unemployment and explained that Russia was using it to avoid necessary pain.  What was really needed was to cut off the painkillers and lay off everyone who was working without pay.  And even then, the article filled me with incoherent rage. If Russian coal miners were working twelve months a year and only getting paid for two, apparently they were only being paid for a sixth of the time.  Did Russia need to lay off five-sixths of its coal miners?  Presumably coal production would fall to a sixth of its former levels.  Imaging the consequences to the economy as a whole!  Or consider the boot factory.  Granted, Russian industry produced a lot of worthless products that no one needed.  But if there is one thing that Russia needs, it is heavy winter boots.  But what measure could Russia possibly be better off closing down its boot factory?  The the Christian Science Monitor have any idea how much of the population it was proposing to throw into unemployment?  Or what the economic and social consequences could be?  I suppose I should at least be glad that the Monitor did not address the instance of agriculture.  How many Russian farmers were producing for subsistence or bartering rather than selling their surplus crop.  Would the logic of the Monitor article be that Russia should cut back its agricultural produce to what could sell for cash?  And, if so, would the result be starvation on a scale that would make Stalin look humane by comparison?

In any event, what was actually happening in Russia was actually extreme deflation, to the point that the ruble had collapsed and largely stopped circulating.  Because prices and especially wages are "sticky" and resist falling, deflationary pressure introduces distortions into the economy, like coal miners working twelve months out of the year and only getting paid for two.  Indeed it can be argued (and has been argued) that depression/recession is simply a form of distortion caused by deflationary pressure.  What Russia needed was not to shrink its economy even further, but to release the deflationary pressure.  Yet everyone was doing their utmost to avoid such an outcome, bailing out Russia again and again in exchange for promises of yet more painful "reforms."  Finally in 1998, the rest of the world said enough was enough and allowed the crisis to happen.  Russia defaulted and devalued.  Import prices surged.  Inflation hit 84% in the first year.  Banks failed.  The pain was real, severe -- and short-lived.  The inflationary pressure was relieved, and Russia finally began to recover.  Devaluation and default, however, painful turned out to be what the economy needed -- as well as being a whole lot less painful than what the Christian Science Monitor etc had proposed.

And Greece is showing many of the same symptoms.  In the tourist industry (the strongest), people have gone months with out pay.  Barter networks are going up because money is so short.  All these are signs of deflationary pressure.  How will we know when Greece has suffered enough?  The conventional answer is, when the economy starts to improve.  Furthermore, conventional wisdom has it, Greece was actually beginning to improve when the people committed the ultimate sin, like Latin American countries in the 1980's, and elected a government that put the well-being of its domestic population ahead of foreign creditors.  This must be atoned for by yet more suffering to assure those creditors that they didn't really mean it.

The most popular metaphor in many of these cases has been "major surgery without an anesthetic." And who would doubt that sometimes major surgery is necessary, and that even when done with an anesthetic it is painful (post-surgery).  But the general attitude of the IMF crowd has always been that the more traumatic and painful the measure, the better, even if it achieves nothing but to show the country's "sincerity" in putting foreign creditors ahead of its domestic population.

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