The Wall Street Journal and the Troika Fear they Have Not Adequately Terrorized Greece

By William K. Black
Washington DC: January 6, 2015

I’ve written recently about the embarrassing nature of the New York Times’ coverage of Greece (and the eurozone more generally), so it is time to describe the even more appalling coverage by the Wall Street Journal. The WSJ has published a series of articles that contain facts that demonstrate how self-destructive the troika’s infliction of austerity has been to the eurozone, but those articles do not express that conclusion.

Worse, the WSJ publishes a steady dose of articles by Simon Nixon that are presented (at least on the web where I read them) as if they were news articles. Nixon’s job title with the paper is “Chief European Commentator,” but that title is not stated in the series of recent articles about Greece and the eurozone. He appears to have a B.A. in History and once worked as an investment banker. I assume that the WSJ’s defense of his columns is that he is a “commentator” rather than a reporter of the news though on the web I see no indication that readers are warned that they are not reading a news article.

I will provide quotations from his columns illustrating Nixon’s strong personal views on economics and politics that drive his conclusions. In my first column on his recent articles I critique his column that purports to explain why the eurozone has, once more, stagnated. Nixon concedes that adequate economic demand for goods and services is essential to economic growth and employment. He begins his article by stressing that eurozone “inflation fell alarmingly close to 0%” in December 2014. That is a sure indication of grossly inadequate demand. Long before deflation begins, such a low rate of inflation demonstrates a serious risk of recession due to a critical lack of adequate demand. Nixon’s purported explanation for the eurozone’s pathetic growth under austerity makes that point explicitly.

“These were shocks over which the eurozone had little control and which may continue to exert a drag on growth in 2015, although the impact of weaker emerging-market demand may yet be partially offset by the stimulatory boost from lower oil and commodity prices.”

“Emerging-market demand,” of course, is a far less important driver of eurozone economic growth than are domestic demand and demand in developed nations, particularly other eurozone nations. Nixon’s discussion of demand is incoherent. Here is how he introduces the concept of the first two sources of inadequate demand that he describes as harming the eurozone economy.

“Where did it all go wrong? Three factors in particular stand out. The first was the impact of the slowdown in growth in China and other emerging markets, itself a response to the prospect of tighter global liquidity conditions as the U.S. Federal Reserve ended its own quantitative-easing program. The second was the impact of the Ukraine crisis and the sanctions imposed on Russia, which had a particular impact on the German economy.”

The first two factors he describes are sources of inadequate demand. The (small) “impact of the Ukraine crisis” on overall eurozone growth was produced by (slightly) reduced Russian demand for eurozone exports. The far larger sources of inadequate demand, however, were those I mentioned – domestic and intra-eurozone demand. Japan’s economy is also tanking due to a sudden move to austerity, but Nixon ignores that fact.

At this juncture, we have Nixon conceding (1) that the eurozone economy tanked (again) because of inadequate demand, (2) discussing two (relatively minor) contributors to that inadequate demand, and (3) ignoring the far larger sources of inadequate demand in the eurozone because those sources would strongly support the need for stimulus and demonstrate the self-destructive nature of “bleeding” the economy through austerity.

The logical implication of these points that Nixon concedes is that the government should be providing the unmet demand and aiding the eurozone’s recovery. The last thing it should be doing is inflicting austerity and further reducing already inadequate demand. But Nixon isn’t strong on logic, economic theory, or economic history.

“Those who argue that the eurozone’s core problems are structural are confronted by a simplistic Keynesian analysis that holds the eurozone’s real problem is a lack of fiscal and monetary stimulus, that its challenges are macro rather than micro, reflecting lack of demand rather than impediments to supply. Policies to eliminate wasteful spending, improve efficiency, enhance productivity and boost potential growth are dismissed as growth-sapping austerity.

The anti-austerity banner has become a rallying point for resistance to all reform, reducing the political space for governments to tackle structural problems. Support for radical leftist parties is being fueled by the naive belief that if only Germany would repair its bridges or the eurozone would build more roads or the ECB would embark on quantitative easing then governments would have no need for spending cuts or reforms.”

Every sentence of this is illogical and substitutes rhetoric for logic, theory, and history. The first sentence sets the tone: “Those who argue that the eurozone’s core problems are structural are confronted by a simplistic Keynesian analysis that holds the eurozone’s real problem is a lack of fiscal and monetary stimulus, that its challenges are macro rather than micro, reflecting lack of demand rather than impediments to supply.” Nixon just conceded in his first two asserted causes of the eurozone’s (long-run economic failure) that inadequate demand for eurozone exports by Chinese and Russian consumers constituted the first two causes of the eurozone’s (latest) stagnation. While Nixon ignored the fact, he cannot deny that the far larger causes of that inadequate demand were inadequate domestic and intra-eurozone demand. The eurozone cannot do much about inadequate Chinese and Russian demand, but it can ensure adequate domestic and intra-eurozone demand through increasing net government outlays. Under Nixon’s own logic it should do so. Under Nixon’s own logic the last thing it should do is reduce already inadequate demand by reducing net government outlays through further austerity.

There is nothing “simplistic” about that analysis. It is straightforward economic analysis backed by economic history and Nixon’s own concessions. Nixon conceded that the “macro” “challenges” posed by inadequate demand for eurozone exports by Russia and emerging naitons like China were so severe that he purports that they constitute the first two reasons why the eurozone economy has stalled again. Logically, the far larger inadequacies of domestic and eurozone demand must greatly exceed the “macro” “challenges” that he claims caused the eurozone economy to stall. It is straightforward under even his flawed presentation that the eurozone should greatly increase demand by increasing net governmental outflows and should not make the problem worse by reducing already inadequate domestic and intra-eurozone demand through austerity.

Nixon tries two sleights of hand to try to avoid the reader focusing on the self-destructive nature of austerity under his own concessions. He claims first that the eurozone’s “core” problem is “impediments” to “supply.” There are five “core” problems with that assertion. He does not support his claim with evidence. Two, he does not explain what he means by the term “core” and then support that definition with evidence.

Three, if Nixon means to imply that a nation cannot recover from a recession without making major “micro” changes that is demonstrably false. Nations in recession can use fiscal policy to provide sufficient demand through “macro” economic fiscal policies to provide full employment and substantial growth – and they can adopt job guarantee programs that quickly restore full employment. It is true that monetary policy can be far less effective in spurring a recovery from a serious recession. It is also true that because the eurozone nations gave up their sovereign currencies the ECB has to fend off the bond vigilantes to allow them to provide appropriate fiscal stimulus. The ECB has (belatedly) realized the last point and intervened by providing an implicit guarantee of eurozone sovereign debt.

Four, Nixon is making up the “impediments” to “supply” that would supposedly make it impossible for the eurozone to grow substantially even if demand were adequate to provide full employment. The eurozone has huge numbers of unemployed workers – a veritable army of the unemployed. That suppresses demand, but it provides a large labor “supply” that workers could hire. Banks (and many corporations) are sitting on enormous amounts of cash that they could lend or invest. The eurozone can readily purchase supplies of goods and equipment and (unless Russia cuts it off) fuel. Eurozone producers don’t provide more goods and services overwhelmingly because no one will buy those additional goods and services at a price the producers find desirable. That is what insufficient demand means.

Five, Nixon’s claims lack internal logical consistency. He claims that lack of sufficient demand from China and Russia are the first two reasons that the eurozone economy has stalled again. Logically, that must mean that increased demand would improve eurozone growth – despite his asserted “core” “supply” “impediments.” Solving “supply” “impediments” is not a substitute for providing sufficient demand. All nations suffer from what Nixon labels the “micro” problems of “corruption,” but many of them achieve full employment and much more rapid economic growth than the eurozone. Under Nixon’s own logic, even if crippling “supply” “impediments” existed in the eurozone the answer would be for the government to simultaneously provide the necessary increase in demand and reduce the “supply” “impediments.”

The next sentence of Nixon’s article contained his second sleight of hand. “Policies to eliminate wasteful spending, improve efficiency, enhance productivity and boost potential growth are dismissed as growth-sapping austerity.” No. It is fine to eliminate spending that is in fact “wasteful.” The key to economically literate fiscal policy in response to a recession is providing the otherwise inadequate private sector demand through adequate aggregate increases in net government outlays. Cutting spending on corporate welfare by fifty billion euros while simultaneously increasing spending on education, job guarantee programs, health, anti-corruption and elite white crime programs, and infrastructure by $300 billion euros would be a fine policy for the eurozone. Tax cuts for the working class would not have the same beneficial micro effects as expanded government spending in the categories I just discussed, but they would produce increased demand for goods and services. But that is not what the troika does. The troika forbids economically literate fiscal policy under the oxymoronic “Stability and Growth Pact.” Increasing government spending on education, job guarantee programs, health, criminal justice programs targeting corruption and elite white-collar crime, and infrastructure would “improve efficiency, enhance productivity and boost potential growth” as even the Washington Consensus admitted. Government programs undertaken in large part for macroeconomic reasons are among the most effective means of producing “micro” economic improvements. Nixon is trying to foist a false dichotomy. The problem is that the programs that the troika extorts the nations of the eurozone periphery to adopt are often designed to further reduce wages by creating a “race to the bottom” among eurozone nations.

Nixon concludes his internally inconsistent assertions with this paragraph.

“The anti-austerity banner has become a rallying point for resistance to all reform, reducing the political space for governments to tackle structural problems. Support for radical leftist parties is being fueled by the naive belief that if only Germany would repair its bridges or the eurozone would build more roads or the ECB would embark on quantitative easing then governments would have no need for spending cuts or reforms.”

Recall that Nixon conceded that demand for eurozone goods and services was so inadequate that growth had, once again, stalled. Nixon clearly knows that fiscal stimulus would increase demand. Under his own logic, that is desirable, indeed, vital. But it his last lines he claims that there is a “need for spending cuts.” Under his own logic there is a “need” for net “spending” increases rather than “cuts” by the eurozone nations.

It is insane that Germany, which has a serious infrastructure problem, zero inflation, and a budget surplus is not making dramatic improvements in its infrastructure. Note that Nixon does not attempt to defend Merkel’s madness – he tries a third sleight of hand. Of course austerity “has become a rallying point for resistance” to the troika’s economic malpractice. That is what happened when the austerity demanded by the Washington Consensus was inflicted on Latin America. It is unforgivable that the troika caused a gratuitous second Great Recession – and worse than Great Depression unemployment in much of the eurozone’s periphery – through austerity. It compounded the inhumanity and economic illiteracy that the troika also caused elected leaders to fall, extorted Greece to ban a vote, and sought to slash workers’ wages. The troika’s slavish adherence to Germany’s demands could lead to a third eurozone recession in six years. Nixon, however, rages at the victims and praises the people and policies that threaten to tear Europe apart.

After conceding that demand for eurozone goods and services was severely inadequate, Nixon framed his assertions about austerity with this clunker. “The eurozone is increasingly paralyzed by a sterile debate focused on a supposed conflict between ‘austerity’ and ‘growth.’” Austerity means reducing already inadequate demand. When nations have inadequate demand there is a direct “conflict between ‘austerity’ and ‘growth.’”

I do not understand why Nixon used internal quotations around the words austerity and growth. The eurozone is “paralyzed” by austerity. There has been no meaningful “debate” about austerity because Germany held all the power, used that power via diktats to extort other eurozone nations to do its bidding, and embraced the facially false claim that “there is no alternative” (TINA) to austerity. The debate against austerity is not “sterile” – it is critical to ending the catastrophe that Germany and the troika have inflicted on Europe.

Nixon, however, is still warming to his hate for economics and the fact that Greece dares to hold a democratic debate about the economic malpractice that is austerity. Nixon fears that Germany will lose any debate about austerity on the merits. Despite his concessions about inadequate demand, the ability of increased net government expenditures to supply that demand, and the repeated failures of austerity he now flames at economic theory and economic history.

“Never mind also that a collapse in fiscal discipline risks undermining not only market confidence but also the trust between governments vital to future integration. And never mind the warnings of Mr. Draghi and others that stimulus without reform will harm rather than help the eurozone. Faith in Keynesian magic bullets is impervious to such concerns.”

Let’s unpack each sentence. “Fiscal discipline,” for the reasons he has already conceded, is an oxymoron. It is not “discipline[d]” to try to run budgetary surpluses in response to a Great Recession – it is economic malpractice. It is “fiscal self-flagellation”   “Market confidence” is a problem because the euro was a terrible idea. It gave up the enormous advantages of a sovereign currency. The ECB can, and (after far too long a delay), does prevent the bond vigilantes’ assaults. (Again, I expect the ECB to threaten Greece during the election by threatening to remove the implicit ECB guarantee of sovereign debt.)

Let’s discuss the concept of “the trust between governments vital to future integration.” The “integration” was supposed to create a caring “community.” Germany and the troika gratuitously forced the 100 million residents of Spain, Italy, and Greece into Great Depression levels of unemployment. Greece is suffering from trauma that exceeds that of the original Great Depression. There was no reason for Germany and the troika to do this to Greece. The bailout was largely a bailout of foreign banks, including the German banks.

There was no reason to for the troika and Germany to insist on the mass unemployment of the peoples of Spain, Greece, and Italy. Government job guarantee programs were an obvious “win-win.” One should recall that Greece was one of the many nations subjected to brutal occupation by the Germans. The Greeks are well aware that the Germans despise and mock them and used the troika to prevent them from voting on whether they favored austerity. The Greeks know that they lost their national sovereignty and honor when their leaders gave in to Germany’s extortion. It is Germany, and its stony indifference and even hostility to the Greeks and the Greek Nation that has destroyed “trust” and any impetus to “future integration.” It is telling that Nixon blames the Greeks and does not even mention the words “unemployment,” “poverty,” or “suicide” in this article – three of the critical hrms inflicted by austerity.

Yes, “never mind” Draghi’s assertions that providing demand through fiscal policy and spurring growth and employment will “harm the eurozone” while further reducing already inadequate demand through austerity will somehow help the eurozone. Even Draghi now admits openly that Germany is harming Germany and the entire eurozone by refusing to reduce its self-destructive fiscal policy of running a surplus because the result is inadequate demand. Draghi has proved consistently wrong about austerity. The economists – the vast majority of economists – who have criticized austerity have proven consistently correct as even the IMF studies demonstrate.

Nixon, despairingly, ends his claims with this: “Faith in Keynesian magic bullets is impervious to such concerns.” There is nothing “magic” about the concept that adequate demand for goods and services is critical to achieving a strong economy. Nixon concedes that is true. There is nothing “magic” about the concept that eurozone demand is deeply inadequate. Nixon concedes that is true. There is nothing “magic” about the fact that if the government increases its net expenditures it directly increases demand for goods and services by buying goods and services. There is nothing magic about the results. Countercyclical fiscal policy has shown itself highly effective against recessions.

Even the eurozone agrees with each of these facts – it explains that it too uses “automatic stabilizers” that ensure fiscal deficits in response to a recession. The eurozone says that such countercyclical fiscal policies are desirable in reducing the severity and length of a recession. The problem is that the “Stability and Growth Pact” allows only very small budget deficits in response to even a Great Recession, or in the case of much of the periphery, a Great Depression. The intended deficits allowed under the Pact are far too small to fill the enormous drops in private sector demand. The “magic bullet” metaphor aptly describes the proponents of austerity, who have never been able to craft a logically coherent explanation of how cutting already inadequate demand supposedly spurs growth. Indeed, this is why Paul Krugman has had such fun in mocking the austerians’ belief in the “confidence fairy” that is supposed to magically convert pro-cyclical fiscal policies into countercyclical fiscal policies.

Nixon ends on the note that drives his assertions – ideology. He starts by bashing Greek opponents of austerity but ends by putting in print his fears that Europe may be transformed politically by austerity in a manner similar to the way Latin America was in response to the economic failures ushered in by the Washington Consensus’ austerity demands.

The WSJ took a casual swipe at Greek opponents of austerity in a photo caption in Nixon’s article: “Alexis Tsipras, whose radical left-wing Syriza party is ahead in Greek opinion polls.” Wow, if opposing austerity, favoring the restoration of Greek sovereignty and democracy, and supporting fiscal policies that the ultra-conservative Washington Consensus recommended makes one a “radical left-wing” what phrase will the WSJ use to describe the German and troika officials who gratuitously forced much of the periphery into a second Great Depression by insisting on economic malpractice and extorted Greek leaders to savage their nation and block any democratic vote on austerity?

Nixon ends with his great fear, which is Europe’s great hope.

“But potentially more troubling threats to stability may emerge elsewhere [than Greece]. Weak governments in France and Italy may not be able to withstand the ideological tide. Elections later in the year may bring antiausterity parties into government in Spain and Portugal.

Policy makers may try to buy off this counterreformation by acceding to demands for extra stimulus, but all they can buy is time. The eurozone has no capacity to force member states to embrace the path of virtuous reform—even when its own survival is at stake. That remains its central weakness.”

Austerity was inflicted through the “ideological tide” of TINA. Such an “ideological tide” and TINA were essential because austerity cannot survive serious economic debate. Stimulus does not simply “buy time” – it speeds recovery and dramatically reduces human misery.

Conclusion

Nixon is almost right – even when the “survival” of German domination of the eurozone “is at stake” and the “virtuous” alternative of vastly reducing human misery through competent fiscal policy is readily available the eurozone “has no capacity to force” Germany to cease it economic malpractice and “embrace the path of virtuous reform.” “That remains its central weakness.”

 

4 responses to “The Wall Street Journal and the Troika Fear they Have Not Adequately Terrorized Greece

  1. Stavros Karageorgis

    A veritable tour-de-force, Professor Black!

    It’s one thing when, out of ignorance, people cannot see things clearly. It’s quite another when they can and MENDACIOUSLY continue to insist, and seek to convince others, that things are different than they really are.

    Germany and the Troika’s prescriptions for Greece and other peripheral Eurozone (and, gasp, even those who are at present outside but are seeking to enter it) amounts to what pathogens would ‘advise’ organisms so that they could infest and infect them more easily: Lower your immune defenses, overexert yourself, make your most vulnerable components more receptive to us!

  2. Greece has an easy way out. Immediately exit the Eurozone eurozone unilaterally, redenominating all banking deposits, loans, and contracts to drachma over a weekend. Then recapitalize all banks by having the Bank of Greece purchase stock in them. (This need not create moral hazard. The banks could be examined and the shareholders of insolvent banks could be wiped out. The bad assets could be transfered to a “bad” bank and the emerging good banks would be temporarily state owned enterprises which could eventually be reprivatized) The big miss of the ECB is that it never fixed its the banks, it simply injected more and more liquidity into an insolvent banking sector. Just look at the pathetic uptake on the LTROs. Those of us who accept endogenous money know that bank lending is never reserve constrained, always capital constrained. Banks are not lending because they have limited risk taking capacity given their lack of capital. Moreoever, fiscal austerity has crippled economies to the point that aggregate demand is so low nobody wants to borrow anyway.

    Next, Greece should use its newly empowered drachma issuing central bank to stabalize the market value of its sovereign debt and reverse all the destructive austerity. Recovery would come rather quickly.

  3. Steven Penfield

    A well-argued piece. If the euro zone was suffering from the lack of supply, inflation not deflation would be the problem!

    I have a burning question. Does anyone benefit from this apparently logic-less austerity, or is it just a madness?

  4. Pingback: EU Deflation Arrives and the Troika Continues to Fiddle While the EU Burns - New Economic PerspectivesNew Economic Perspectives