Normal people are hard-wired to dislike inequality, it appears.
It reminded me of the famous quote from Keynes, in this beautiful essay:
The love of money as a possession -as distinguished from the love of money as a means to the enjoyments and realities of life -will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.
It is a truth universally acknowledged, that the purpose of blogs is to provide free advertising for a blogger’s own books. Let me buck the trend then, by giving a plug to Cormac’s latest offering, a great example of the power of economics (and history) to illuminate the human condition. I discussed it on last Saturday’s Off the Shelf, which you can download here.
Today’s IT carries an article by Brian Lucey on recent banking developments. You can read it here.
A reader has pointed me towards this nice post by Michael Pettis, which strays from his usual Chinese turf to take a look at Europe. It makes the same points as the ones Martin Wolf has been making about the need for the large countries with ‘fiscal room’ in the Eurozone, particularly Germany, to do everything they can to maintain aggregate demand in the Eurozone.
This should be obvious to anyone with an understanding of intermediate macroeconomics, so I won’t comment on it. But Pettis also cites Barry Eichengreen’s classic Golden Fetters, which readers may not be familiar with, and in particular Barry’s views on the implications of democracy for the maintenance of the gold standard. That system required adjustment through deflation for countries suffering negative shocks. This was not necessarily a problem in the 19th century, when wages and prices were flexible, and universal suffrage was rare. By the 20th century, however, rigidities in the economy were such that deflation implied unemployment; and democracy meant that this economic cost translated into a direct political cost for policy makers. The gold standard, inevitably, broke down when confronted with the pressures of the Great Depression.
I don’t think it’s fair to compare the euro to the gold standard, as Pettis does. The ECB has lowered interest rates, not raised them, although not by as much as other central banks; and both the French and the Germans have applied fiscal stimulus to their economies. On the other hand, it is true that adjustment in the PIIGS now implies deflation there (unless, as the FT points out today, inflation in the Eurozone as a whole is increased). This is going to be both economically and politically costly, and will have unpredictable effects, especially if the Eurozone as a whole experiences a double dip recession.
I suspect that Ireland will find these adjustments easier to bear than most, since emigration gives us both an economic and a political safety valve. (That was a positive rather than a normative statement by the way.)
With all the talk about debt crises last weeek, it is easy to forget that there is a real economic crisis afflicting Europe as well. The 4th quarter GDP numbers were disappointing, and the fact that Eurozone industrial output fell 1.7% in December is alarming. Unemployment is still rising, and the real Eurozone economy is not out of the woods yet. A primary focus of economic policy still needs to be the avoidance of a double dip.
The fact that little Ireland is having to cut expenditure and raise taxes at a time like this will further worsen our own economic problems, but is of no broader consequence. How many Irish people have even noticed what is happening in Latvia? The same could be said of Greece. But if the entire periphery found itself having to fight market panic by cutting in an excessive fashion, simultaneously, that could be very dangerous — especially if Spain, or, God forbid, Italy, became involved as well.
Martin Wolf is very good on this, while those of you of a more temperamental disposition may enjoy Simon Johnson’s latest piece, with Peter Boone. The core Eurozone countries don’t just have to ward off self-fulfilling market panics focussed on the PIIGS, but continue to support aggregate demand in the Eurozone. I understand concerns about government debt, but people focussed on that problem should remember three things. First, deficits will continue to rise if the real economy worsens, and a lack of aggregate demand is still a problem for the real economy. Second, the more the ECB does to loosen monetary policy, the less is the burden which fiscal policy has to shoulder. And third, if we experience another year like 2008-2009 any time soon, the probability of a wave of defaults will rise sharply.