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I’ve been trying to do a sort of Clintonesque triangulation, where I accept a good bit of both sides of the euro-debate, but not all. In other words, the current crisis is caused by both dysfunctional socio-economic systems in the European periphery, and by a dysfunctional ECB. I suppose to some that sounds like a cop out, but I have very good reasons for taking this position.

Let’s start with the conservative position on Europe, which was very ably defended by Tyler Cowen in this post.

Ryan Avent tweeted: Dear @tylercowen, Germany and the periphery ARE morally equivalent. How might a response go? Not an argument that German citizens are morally superior to other Europeans; that would be false and indeed repugnant. I mean the kind of “system-wide” moral judgments that progressives offer up when they judge the institutions of Denmark to be superior to the institutions of Mexico, of course without ever judging the residing individuals per se. Let’s play at intellectual Turing test“” with no commitment to endorsing these views “” and draw up a short list of, dare I so label them, (ostensible) German moral superiorities:

Read the whole thing. The post is very impressive, so much so that I’d easily lose an Oxford debate with Tyler. So why do I say; “Yes but . . . ?”

Because of the interwar period of world history. Start with America’s very uneven performance between 1921 and1933. What lessons can we draw? I’d argue that the US circa 1921-29 was close to a conservative paradise, at least as conservatism was defined back then (obviously modern conservatives don’t agree with the racial and gender discrimination of that era.) The economy seemed to have almost no “imbalances,” whatever they are. Fast growth led by huge productivity gains, low unemployment, no inflation, no trade of budget deficits, relatively free markets. And then it all collapsed during 1929-33, as tight money caused NGDP to fall in half. Inevitably some commenters will mention the bad supply-side policies adopted by Hoover (taxes, tariffs, and wage jawboning) but they were far too minor to create the mother of all depressions, and indeed should have led to wage and price inflation, not deflation. Instead, money was the main culprit. But the conservatives of the era could not accept that, so in 1932 they mumbled about workers in the late 1920s living beyond their means, feeling entitled to own cars, radios, and iceboxes. Given what we know about the mass consumer economy after WWII, how likely an explanation is that?

No, the Great Contraction wasn’t a moral problem. The left is wrong in saying it was caused by income inequality, and the right is wrong to portray it as the hangover after an orgy of excess during the 1920s. It was a technical problem, plain and simple. Too little money.

Europe is both, a technical (tight money) problem and a set of structural problems.

Now let’s consider the second half of the problem, the structural weaknesses in the Mediterranean countries. When I did a study of neoliberal policies and cultural valuesof all 32 developed countries back in 2007, I was shocked to find that the “best” cultural values were in Denmark and the “worst” cultural values were in Greece. Why was I shocked? Because Greece was doing quite well in 2007. It had grown rapidly, and its income level was only modestly lower than Germany. Indeed Germany’s income per capita (PPP) was $33,820, lying somewhere between Greece ($32,520) and Iceland ($34,060.) How times have changed! Don’t laugh, but I viewed the success of Greece as a weak point in my argument. So I’m certainly not going to contest Tyler’s cultural argument. But I am going to discuss how it might be misunderstood, and tweak it slightly.

I predict that most readers will have difficulty processing Tyler Cowen’s disclaimer that he is not making invidious comparisons between people, but rather merely describing “cultures,” which have a sort of life of their own. So I’d like to put some meat on the bones of this idea, so that people don’t just assume Tyler is trying to be PC.

1. Some cultural differences do apply to individuals. If I claim the American culture is more gluttonous than the Japanese culture, then I also mean American people are individually more gluttonous than Japanese people. It is an invidious comparison, at least if you consider gluttony a bad thing. (I have no opinion on the subject.)

2. However, cultural characteristics that relate to the organization of society are not as embedded in individuals as it might seem. It almost makes more sense to view culture as something “in the air.” That’s why Greeks and Sicilians do very well in America, and easily blend in to our culture. That’s why Israel is quite different from what one would predict if the only Jewish people you had met were those living in America.

3. When discussing the superiority of a given culture, you always need to identify the context. Superior at what? Producing wealth? Producing equality? Producing peace? Producing strongly knit families and communities? Producing great art or great science? Producing un-neurotic people? Producing joie de vivre? Being fun places to visit?

4. And even if you mean “good at producing successful economies,” it’s still not an easy call. People often see the cultures of Germany, Japan, Korea, and China as being well-suited for economic success. Yet all four countries were economic basket cases in 1945. If an asteroid had destroyed Earth in 1945 the last word on culture would be that Germany had one of the worst societies on earth. Admittedly, pulling out the Nazi example is usually the last refuge of a losing argument. But suppose an asteroid has destroyed Earth as recently as 2002. The last word on Germany would have been that its culture is too “rigid” to adapt well to the post-manufacturing world, and that Catholic upstarts like Ireland and Spain were much more dynamic. There is no last word on culture. All judgments are contextual, and provisional

5. Despite all these provisos, my hunch is that culture is fairly important, and Tyler’s judgments are reasonable. If you don’t agree, consider the following example: Both Afghanistan and North Korea are extremely poor. Which country do you think is more likely to be rich in 2061, fifty years from today? Of course we’ve been wrong before; as recently as the 1950s the small East Asian countries were widely expected to do poorly in the coming decades. We might be wrong again. But right now Korean cultural values seem to be quite useful for the purpose of generating fast RGDP growth.

Bottom line. Europe needs BOTH more NGDP and structural reforms (which may require cultural change.) But not bailouts.

It’s possible that tight money might speed economic reforms, just as economic sanctions on Cuba might speed political reforms. But history suggests that tight money usually leads to bad supply-side policies, and trade sanctions usually fail, as political reform is highly correlated with economic growth. When in doubt, always place your bets with “doing the right thing.” Don’t do bad policies in one area in the hope that they’ll generate good policies in another area. Do good policies in the hope they’ll generate other good policies. That way if you are wrong about spillover effects, at least you have the good policies in one area.

PS. I would quibble with Tyler’s point 9:

9. One clear warning sign of trouble is when you see “trade imbalances” put at the center of the argument, as if “being very productive” and “not being productive enough” were somehow the same kind of disease.

By all means keep “trade imbalances” out of all arguments. Not because they tell us something interesting about productivity, rather because they tell us nothing interesting about anything.

PS. Although I quote Tyler Cowen, this post is not really a rebuttal. I have no idea what he thinks of the views expressed here. Oddly, I find myself agreeing with much of what Tyler says, but also with much of Ryan Avent says in opposition. Are they talking past each other, or am I just a muddled-headed easily impressionable person?

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This entry was posted on December 02nd, 2011 and is filed under Eurozone, Great Depression, Misc., Monetary Policy, Social trends. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



