The Greek Experiment

Let me congratulate the Greeks for taking the first, but only the first, step towards a more civilized economic policy. I am intrigued by the prospect of Yanis Varoufakis as economic minister deep in argument with any of the large number of radicals that infest European economic posts. And, yes, they are the radicals. The notion that aggressive austerity measures can engender growth and can be mostly benign with respect to employment, wages, and other immediate aspects of economic life is a radical, almost extreme, idea honed most recently to protect wealthy elites from having to engage with the rest of the societies inside which they exist. Against this form of radicalism people like Varoufakis, despite being smeared as radicals themselves, are more orthodox than not. At least they realize that economies are not mere models to manipulate, but are collections of people whose futures and dignity are surely worthy of consideration alongside such abstractions as markets or efficiency.

Any economy that is suffering 28% unemployment and which has experienced a drop of about 25% in GDP is a candidate for a shift in economic policy because it is evident that the existing policy – the one that produced those levels of unemployment – is not working. The experiment of imposing extreme austerity in order to protect the Greek banking system, which is what the Greek crisis resolves to, is an absurd and inhuman failure.

The austerity imposed on Greece in return for financial support was supposed to achieve a twofold result: Greek debts were targeted to decline as the government’s budget was brought into balance; and the Greek economy’s competitiveness was expected to recover making it possible to eliminate Greece’s chronic trade account deficits.

While it is true that Greek competitiveness has recovered somewhat – the trade balance now has a modest positive balance – the recovery is an illusion: it is more a function of the collapse of Greek demand for imported goods than it is a sudden recovery for Greek exports.

What about that collapse of an appetite for imports?

When your economy sheds nearly one million jobs in the space of a few years, demand is bound to plummet.

And when you deliberately create such an implosion all sorts of other bad things happen. Such as the pernicious decline in prices called deflation. Whilst the notion that prices are declining may seem attractive to those of us still living with memories of 1970’s double digit inflation, they are, in fact, a very bad phenomenon. The most obvious nasty outcome being that it makes the repayment of debt more difficult: since, under deflation, the real purchasing power of wages has risen [you can buy more goods with the same amount of cash], and since the debt is denominated as a fixed quantity at the moment it is created, the implication is that the inflation adjusted value of debt also rises. The result being that someone has to forgo more goods in future to pay down the same amount of debt as in the past. Not only this but cashflows for businesses diminish – they are selling the same number of things but at lower prices – this forces employers to reduce wages and/or employment, which, in turn reduces the purchasing power within the economy and hence demand.

It is easy to think through why deflation is so harmful potentially.

Yet those who seek to impose austerity blithely ignore the deflationary threat. Indeed they often imagine that they are fending off the precise opposite. The delusion is extraordinary.

More to the point the entire construct of austerity fueled growth is an imaginary one that is both novel and bizarre. All the evidence suggests it being a total illusion, yet it has a grip on the minds of key policy makers, especially in Europe.

So the Greek experiment is not what Varoufakis might start to suggest as sound economic policy, but what has been enforced on Greece these past few years.

We are not entering a period of economic experimentation, we are exiting one.

It is a lesson we ought to learn here in the US where the experiment of extreme economics has, for the past thirty years, resulted in a whole host of bad outcomes for average American families. It is time to return to an economics that acknowledges the purpose of policy being to enhance the lives of those who comprise the economy, and not to treat those lives as just one variable in an elegant equation where the ultimate goal is efficiency and not dignity.

People will choose dignity over efficiency more often than orthodox economists want to believe. This does not mean people will avoid tough trade-offs, it means that people need to be assured that policy makers take them into account when prescribing policies that have life damaging outcomes.

In a nutshell: if we had more unemployed economists we might, possibly, have an economics more sensitive to the human condition than that which now dominates policy. Perhaps the Greeks can lead the way.