Dani for President
Dani Rodrik has an excellent piece on Project Syndicate. I strongly advise reading and sharing it. Rodrik points out that structural reforms (if well designed, I’d add) tend to destroy jobs in low productivity sectors, and to create them in high productivity ones. He then argues that for the second effect to happen, the high productivity sectors need to face strong demand. This is not happening right now, so that structural reforms, where implemented, are only contributing to depressing employment and growth. He concludes that the very success of structural reforms depends on fixing the short run aggregate demand deficiency problem, through standard Keynesian policies. The zest of the paper is in the last two paragraphs:
Ultimately, a workable European economic union does require greater structural homogeneity and institutional convergence (especially in labor markets) among its members. So the German argument contains a kernel of validity: In the long run, EU countries need to look more like one another if they want to inhabit the same house.
But the eurozone faces a short-term problem that is much more Keynesian in nature, and for which longer-term structural remedies are ineffective at best and harmful at worst. Too much focus on structural problems, at the expense of Keynesian policies, will make the long run unachievable – and hence irrelevant.
Rodrik states something rather obvious: The short and the long run are linked, and to make sure that the intended long run effects of a policy materialize, we need to ensure that it is compatible in the short run with the macroeconomic environment and with other policies. This view is not surprising from an economist who has always recognized the complexity of economic phenomena, and the importance of institutions to accompany market processes.
Obvious, I said. Well, maybe for normal people. Certainly not for a certain type of economists Read this excerpt from the June 2013 ECB Monthly bulletin editorial, also released today:
With regard to fiscal consolidation and structural reforms, the Governing Council welcomes the progress made and encourages governments to continue with determined efforts. It is essential that euro area countries do not unravel their efforts to reduce government budget deficits. The new European governance framework for fiscal and economic policies should be applied in a steadfast manner. In this respect, the Governing Council considers it very important that decisions by the EU Council to extend the time frame for the correction of excessive fiscal deficits should remain reserved for exceptional circumstances. At the same time, it is necessary to continue, where needed, to take legislative action or otherwise promptly implement structural reforms. Structural reforms should, in particular, target competitiveness and adjustment capacities in labour and product markets, thereby helping to generate employment opportunities in an environment of unacceptably high unemployment levels, especially among young workers, prevailing in several countries. Combined action on the fiscal and structural front should mutually reinforce fiscal sustainability and economic growth potential and thereby foster sustainable job creation.
The ECB staff takes the view that structural reforms should be implemented regardless of the current situation. They do not link (I would say that they are not willing to link) the policies they recommend to their own diagnosis of the situation made a few lines above: a situation of stagnating domestic demand due to “heightened credit risk and the ongoing adjustment of financial and non-financial sector balance sheets” (in 4 words: deleveraging is still happening).
Reading the latest ECB bulletin (and the many others that preceded) one has the feeling that the policy prescriptions do not follow from the economic analysis that precedes, but from an ideological prior: Europe has a problem of competitiveness and run-away deficits, hence structural reforms and consolidation are the answer. Never mind that, as Rodrik points out, the former have a much better possibility to work if performed in presence of robust growth. And never mind that consolidation is contributing to deteriorate the economic environment, thus making the two prescription intrinsically contradictory. Market efficiency dictates that structural reforms are the solution everywhere and at every moment, and that big government is bad for growth. Is this contradicted by empirical and theoretical analysis? Who cares. Are the two prescription intrinsically contradictory? Wo cares. Here is my theory, and if the facts do not follow, it is their problem…
Economists in Brussels and in Frankfurt seem to stick to the old textbook dichotomy between short and long run. Rodrik scraps it in just a few lines, and shows how dangerous it can be.
The conclusion to me is straightforward. Dani for President, of any Euro governance institution of his liking