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Panos Evangelopoulos

Short articles by Panos Evangelopoulos, University of Peloponnese, Greece. If the latest article is not listed on top of page please scroll down!

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1. Panos Evangelopoulos - March 13, 2009

A reading of the crisis of the 30s and the present day

Many analysts of the period of deep crisis through which we are currently passing are in the habit of elaborating historical comparisons with the crash of 1929 and the Great Depression that followed in the 1930s. The more sophisticated among them, mostly convinced social-democrats who support every kind of interventionism, speak openly of a return to the period of control of the economy by the state. With the election of Obama and the aura of success that surrounds him, these analysts have turned up the volume on their dissertations, comparing the new age that is dawning with that of Roosevelt and the New Deal.

Nothing could be further from the truth and the times are not favourable for hasty judgements and facile surrender of the global economy into the hands of politicians and bureaucrats. For a start, it is the states and their regulatory authorities that produced the crisis and, today more than ever, are part of it and can in no way participate in the mechanism that will extricate us from it. Like the wise Archimedes teaches us, there is no ground where the state will sustain the lever for securing a solution to the crisis. The foundations of the state are rotten, and the American state in particular, with its bloated deficit and massive debt is the least qualified of all to provide a basis for remedial leverage. The state is the source of the crisis, inextricably and centrally involved in it. Every ill-conceived policy of extending its operations can only bring more trouble, with the world’s economies sinking for years into a quagmire as occurred throughout the thirties, the decade of implementation of the celebrated New Deal.

History teaches, and although it does not repeat itself, it provides us with the means for understanding the mistakes of the past and facing the challenges of the future. The New Deal marked a whole historical epoch, comprising the greatest possible intervention that had ever been perpetrated by the state in the economy, and by the political bureaucracy in the planning of the strictest of frameworks within which individuals must act and markets must operate. But today with the progress of economic history as an autonomous branch of scholarship and the contribution of institutional analysis to study of the data from that time, we know that the New Deal did not work and indeed condemned the American economy to what was historically its most protracted period of stagnation. .

Roosevelt was elected in 1932 and put into immediate application the package of measures for state management of the crisis. In 1937 he was re-elected but unemployment remained at an astronomical 15%, and it would not have fallen if it had not lost its meaning with the outbreak of the Second World War. The eight years of the New Deal were the darkest in American economic history. It is not necessary to resort to statistics. All that is necessary is to read a few of the novels from the inter-war period in the United States to form an idea of the dire situation of that time. Ordinary people, unemployed, without a future, without prospects, on the road or staying put, and beside them big modern manufacturing plants working at less than half of their productive capacity. In the cities the service sector was languishing and trade was grinding on, with turnover in basic necessities and other tried-and-tested products pegged at more or less the same levels. It was as if the America that had contributed so much to the Second Industrial Revolution, and had come to maturity on it, was no more. It was as if Roosevelt, as the surgeon with the most delicate instruments of state regulation in his hands, or as the big stage contractor steamrollering over everything in his path, was working on an economic corpse that had lost all ability to react.

Of course analysts prejudiced in favour of state intervention in the economy limit the Depression to the years 1929-1933 and present Roosevelt and the New Deal as saviours of America and of capitalism. But this is not true. The Great Depression lasted right through to the end of Roosevelt’s second term and only the War salvaged his reputation, reinforcing the mistaken impression of the success of the New Deal. Roosevelt, like Obama today, was charismatic and knew very well how to tell stories and cultivate expectations. His slogan in 1932 was “Happy Days Are Here Again”; there was an upturn on the Stock Exchange when he was elected, but it did not last long and the economy continued to mark time. From 1937 onwards things went from bad to worse. On 18th October 1937 the Dow Jones index fell 7.2% and on 22nd November 1937 it fell 9%. No upturn was in sight. The New Deal had razed the economy to the ground with its one-sided statism and its dilettantish political incompetence, until salvation appeared in the macabre form of an equally destructive world war. To be entirely schematic: to understand how unfavourable were the consequences of the New Deal, how central was its role not only in maintaining but also in exacerbating the longest and deepest depression the world has known, it is sufficient to reflect that from the Crash of 1929 it required 25 years – that is to say until 1954 – for it to return to the levels of the golden decade of the 20s.

Today, in the midst of the severe crisis we are experiencing, the self-regulation and self-correction of markets has, particularly among the journalists of the ordinary press, come to be represented as a parody of free market principles and free market virtues. But apart from being incorrect, this approach is also dangerous, because when ideas become predominant they have consequences, from which we either benefit and go forward or suffer damage and are ruined. The state has never been a panacea for the solution of our economic problems, and this is particularly true of the present day, when it has never been weaker. On the other hand it is the state that has the lion’s share of the responsibility for causing the present crisis, whether through mindless interest rate policies, policies of limitless expansionism employing every possible means, including mechanisms of the Fannie Mae and Freddie Mac type, legislation such as the Community Reinvestment Act, misuse of the privilege of monopoly rights in issuing money, limitless subsidization of the most anti-productive activities, retention of an irrational social insurance system that functions like a black hole swallowing up the entire economy.

Today’s crisis rings alarm bells for the manner in which we must manage the future of Democracy, the State and Markets. The greatest danger of which it is warning us is that of the state and politicians exceeding all bounds of rational functioning and of the tolerance of the economic system, requiring of the economic system something that it cannot give. They legislate demanding benefits that are impossible. Markets cannot be ordered about and when in the face of sound logic and practice the attempt is made to do just this, they become refractory, or – even worse – collapse.

2. proeconomia - September 23, 2011

Stability versus Expansionism

Despite the difficulties and the challenges that it has faced in the decade now ending, Germany has managed through strict discipline both in the workplace and business world and in its governmental policy, to become the first among the developed economies to overcome the serious economic crisis and display significant and stable growth, along with an impressive fall in the rate of unemployment. Despite the fact that the German economy and fiscal system suffered relentless blows from the crisis, with quite a few banks still licking their wounds, as it were, Germany has recovered and is showing the way forward to a rational and stable upturn.

So, how was this remarkable German recovery achieved? In a particularly tough economic environment swept by the global crisis but also a tough monetary environment, with the Euro undergoing constant revaluation, rallying again and again against almost all other currencies, Germany continues to excel as an exporter and to achieve trade surpluses, economic growth and reduction in unemployment. The German success is attributable to the undeniable fact that it has never surrendered to the logic of bloated fiscal deficits, pyramids of accumulated public debt, and has never permitted the European Central Bank to become the printing press for cheap state money. Whatever the difficulties, Germany opted for fiscal and monetary stability. From the outset it chose sacrifice and effort so as to reap the rewards that all of the rest in the European periphery want in the form of long-term loans to secure their survival.

When I cite Germany as an example, my objective is of course not to compare it with Greece or other weak links of the European periphery, but with the USA. Uncontrolled expansionism , fiscal and monetary, from the Obama/Bernanke duet , is going to have dramatically negative consequences.

Gold will continue breaking one record after another in its skyrocketing upward trajectory. Prices of commodities, with first and foremost oil, but also metals, agricultural products from that white gold cotton to cereals, will continue to rise and when the dollar goes over the psychological barrier of $1.40, the European Central Bank will sound the alarm.

If Trichet’s successor is Weber, the only solution – assuming rejection by Germany of any relaxation – will be to promote a bankruptcy declaration of some kind, not only by Greece but also by two other European Union countries, so as to check the erratic course of the Euro as against the dollar, without this posing any threat to German supremacy.

The Germans will sacrifice the European periphery so as to secure sufficient removal of the spreads from the countries of the European periphery to put a brake on the revaluation of the euro against the dollar. This is why it is not enough just to look at Greece to find out what we are up against. Only a generalized crisis of confidence vis à vis the European periphery will send investors back to the dollar.

The more Bernanke keeps printing dollars, the more inclined the Germans will be to place in jeopardy the credibility and creditworthiness of the European periphery. The financial recklessness of the FED is unquestionably placing overt pressures not only on Germany but also on Japan, as well as pinning China into a mandatory and generalized rejection of any possible consideration of revaluing the Yuan. Bernanke’s injections of money to safeguard the shallow and fragile American upturn and in the final analysis to stave off – desperately – the risk of a second recession or twofold bottoming-out make his policy destabilizing for the global economy and so extremely dangerous.

Germany will defend by all means its policy of strictness and discipline. There is no way that it will risk its own stability and prosperity for the sake of undisciplined ne’er-do-well peripheral European economies. It is not the Fourth Reich perennially discussed by marginal publications and analysts but the stamp of its own historical memory on account of the fatal mistakes and tragic failures of the inter-war Weimar Republic . The Germans today, more than ever, base their democracy on stable long-term foundations, resolutely rejecting unsound expansionist policies and untenable iconoclastic approaches.

The more American laxness feeds German severity, the heavier will fall the shadow of this unequal relationship with Germany on the weaker members of the European periphery. The unorthodox and anti-conventional measures employed by Bernanke from the first Bush-Paulson package to the second mammoth Obama-Geithner package and up to the latest movement of 600 billion dollars represent one failure after another. It is all absorbed by the financial sector, with nothing going into the real economy.

Like the supernova that radiates its full brilliance just before its conversion into a black hole whose magnetic field absorbs everything around it, this is precisely the mode of operation of the US financial system. After the splendour of the 2003-2007 period with its dazzling profits and radiant unearned increments, it is as if it has been extinguished forever and is drawing everything into itself. It does not allow anything through into the real sector the US economy.

It is a fact that you will frequently hear certain individuals saying “Ben, print some more money!” The new money is invested in gold exchange-traded funds, in oil futures, in commodity derivatives, in the new speculative bubbles that are being prepared in the emerging countries. What little remains in the USA goes to Dow Jones, with almost nothing being invested in the hope of a dollar devaluation making American products cheaper.

But as Germany has shown, competitiveness is not to be achieved in this way. This is why America is staggering through a fragile upturn, accompanied by growing unemployment and the lurking great risk of a double dip. This situation has been brought about by the latest desperate, and riskier than ever, move by Ben Bernanke.

As one of the most prominent representatives of the Tea Party, Rand Paul is opposed to this unacceptable, uncontrolled and chaotic situation and wants to restore fiscal and monetary stability and above all the Classical American Constitutional Tradition of the limited but stable state, dynamic private sector, hard work and initiative. His slogans are simple and easily comprehensible. No to abolition of tax breaks, yes to smaller deficits and finally a balanced budget, smaller public debt and no more newly-printed dollars.

The reality is that the Tea Party’s impressive victory has humiliated and diminished Obama. But the effective result of this development could be the appointment of Rand Paul to the Senate Committee for supervising the Treasury and Geithner. If this idea is taken up by the Senate, notwithstanding the continuing Democratic majority there, strict control of, and immediate curbs on, public expenditures, if accompanied by retention and consolidation of the tax exemptions introduced by Bush and if Obama abandons his flirtation with the idea of abolishing them, it is quite probable that the foundations will be laid for fiscal rationalization of the American economy. Lower taxes will promote development and curtailment of public expenditures will impose stability.

Only such a world, with a stable America alongside a stable Germany will be in a position to exert significant and real pressure on China to revalue the Yuan so that the global economy can start to divest itself one by one of the disequilibria both in trade balances and in finance. These are the prerequisites for a stable and reliable global upturn based on the performance of the real economy and on heightened competitiveness.

Such a global upturn, in an environment of fiscal and monetary stability, will be balanced and symmetrical over the whole scale of magnitudes, imposing a decisive and prohibitive check on movements of speculative capital, predatory exploitation of wealth which in its next phase will most certainly involve tapping of the tremendous potential of the emerging countries. If all of the developed countries can display stability, then the dynamism of the emerging countries will be the global economic system’s most precious gift, offering the developed countries an exit from the crisis and the emerging countries consolidation and diffusion of wealth even to the most marginalized sections of their communities.

Otherwise, if America and Obama, in alliance with the legendary hero of freshly printed money Ben Bernanke, persist in their out-of-control policies then what will ensue will be a relentless global monetary war which will on the one hand provide tremendous opportunity for speculative profiteering and on the other will lead countries to bankruptcy.

The way of fiscal and monetary stability is the way of virtue, which is why it is thorny and difficult. The lure of fiscal packages and monetary injections is obvious to all, but their results, after a brief and fitful revival, will be disastrous.

The choice centres on the difference between the lure of the easy and a confrontation with the difficult. But societies and economies that are successful are not those that are attracted by the temptations of easy solutions, only to fall victim subsequently to stagnation and recession. They are those that face up to the difficulties and manage to survive and ultimately to prosper.

3. proeconomia - September 23, 2011

Rent-Seeking in the Greek Economic Drama

The austerity measures of the new Greek socialist government of Mr. George Papandreou are unlikely to succeed if even this government that has replaced the conservative government of Mr. Kostas Karamanlis does not bridle the iniquitous, idle, and totally inefficient Greek public sector.

In essence the new austerity measures are neither far-reaching nor comprehensive enough to be able to deal with Greece’s dire fiscal situation .

An appropriate title for the new austerity measures of the Greek government would be “Economic Policy at Gunpoint”, to paraphrase the title of Andreas Papandreou’s book “Democracy at Gunpoint”, which he wrote when he was fighting the dictatorship in Greece in the late 1960s. Andreas Papandreou, father of today’s prime minister George Papandreou, was a radical socialist, both as an academic economist and as a politician, ruling Greece as prime minister in the 1980s and for a few years in the 1990s. .

It was the statesman Andreas Papandreou that started the fiscal crapulence in Greece in the post-Second-World-War era. He escalated both the fiscal deficit and the debt to huge levels while brutally socializing factories, shipyards, refineries, utilities and expanding the public sector to an enormous size. Ironically, in pursuing these policies the socialist Andreas Papandreou was only following, albeit in a more radical way, the broad program of nationalizations that had been established by the conservative Konstantinos Karamanlis. And there is perhaps a similar irony to the fact that the Konstantinos Karamanlis who ruled Greece in the 1970s was the uncle of the more recent former prime minister Kostas Karamanlis who ruled the Greece from 2004 to 2009 and left Greece in an unprecedented fiscal mess.

The third irony, if not the great paradox that brought Greece to the threshold of default, is that it was from the socialist Andreas Papandreou that the young conservative Kostas Karamanlis imbibed his worst lessons in economic theory and his worst policies as a practicing politician. From the beginning of his term in office as a young and fresh Greek prime minister, Kostas Karamanlis, nephew of Konstantinos Karamanlis, led the country on a course of state gigantism that absorbed like a sponge all the revenues accumulated from five years of successful privatizations, with total public expenditure dramatically increasing without political or economic limit. As with Andreas Papandreou, in Kostas’ Karamanlis hands the vast Greek public sector became merely a tool for his re-election and for consolidation of his political position.

The fourth irony, and the fatal mistake of Kostas Karamanlis, was that prior to the elections of October 2009 he announced a freeze on salaries of public sector employees. Faced with the state of emergency in Greece’s public finances, in the eleventh hour, Karamanlis spoke the truth! But nemesis came from the people who had been hired, explicitly or implicitly, in the public sector. His followers, his political “army”, his political “clients”, to use the terminology of rent- seeking theory, did not follow him.

Applying rent seeking approach (Krueger, 1974), (Tullock, 2005, 1967), modern Greece possesses all the characteristics of a deeply rent-seeking society . Politicians work as brokers in a system of political clientelism . They expand the public sector, exchanging jobs for votes. On the other hand they push the private sector into bed with the public sector, assigning to the former secure profits, privileges and finally explicit and legally established rents . On the basis of this trade-off between political and economic rents, farmers are enriched through subsidies and workers’ unions negotiate collective agreements fixing wages much higher than can be justified on productive grounds. .

In short, rent-seeking behaviour is chronic in modern Greek society, resulting in emergence of a generally inefficient institutional economic framework that is financed through a dramatically expanding public deficit and debt and supported by a strong continental currency, the euro. Although it could not have been Greece that Douglass North had in mind, I feel impelled to underline his words on the future of democracies: “The pluralist control of the state which emerged from the struggle of workers, farmers, and business groups has produced the disintegration of the earlier structure of property rights and replaced it with a struggle in the political arena to redistribute income and wealth at the expense of the efficiency potential of the Second Economic Revolution.”(North, 1981, p.185)

What a lesson for all future and potential expansionist politicians, though it cannot be asserted that this is something unprecedented in modern Greek history. The names of Greek rulers change from Karamanlis to Papandreou and back again , the nominal political direction changes between conservatism and socialism, but the size of the state remains stably excessive, not to say anomalous, and fiscal conditions are worsening exponentially!

On the other hand today’s prime minister George Papandreou, son of Andreas Papandreou, who had promised salary increases, Keynesian warming of the economy and redistribution of income, finally as winner of the elections decreased salaries and drastically cut public expenditure. This George Papandreou the younger, since his grandfather of the same name was prime minister in the 1960s, plays the leading role in the modern Greek Fiscal Tragedy, imposing draconian measures to pay for the sins of his father Andreas Papandreou and his father’s “best student” Kostas Karamanlis, with very heavy consequences. I hereby take the opportunity to predict that these austerity measures will meet the same fate as the notorious Laws of Dracon that were applied in ancient Athens. The austerity of Dracon’s Laws was symbolized by their being written not in ink but in blood. They restored order to ancient Athens but were finally reformed by Solon. The spirit of Solon’s Laws was such that they brought harmony without austerity and coercion, ushering in the Golden Age of ancient Athens . Modern Greece is evidently destined to relive the hardship of Dracon before being able to hope for a deliverance akin to that brought by Solon.


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