Economists Propose Roosevelt's New Deal for Resolving European Crisis

By Con George-Kotzabasis

Professor Varoufakis loves metaphors, especially those penned by him! So I too will use a metaphor even if he will hate it. The Modest Proposal (MP) is the offspring of the comely wedlock of Stewart Holland and Yanis Varoufakis but as time passes even beautiful grooms and brides show their wrinkles and need to do something about their withering state and recover their ‘Bo Derek’ status. Thus a new younger bride was added to the old hag this time with a reputable name, though devoid of any accomplishments, that of James Galbraith, the son of the famous John Galbraith. In the two years of the MP”s existence it was unable to entice any eminent economist to support it and only one economist of run-of-the-mill standing added his name to it, i.e., James Galbraith.

The intellectual weight of both Varoufakis and Galbraith has been amply and brazenly demonstrated by a profound article of theirs published in The New York Times, in which they argued that only the left-wing party of Syriza, a potpourri of Marxists, Trotskyists, and green fear mongers, under its leader Alexis Tsipras, a populist demagogue and a mediocrity to boot, could save Greece from the crisis. That the two professors placed the salvation of Greece on the by now historically obsolete and defunct Marxism, vividly reveals their intellectual credentials and on such reputations they are trying to inveigle and persuade first class economists and serious politicians on the European continent that their MP is the panacea that will pull Europe and its periphery out of its virulent crisis.

But to come to the policies of their MP, which they are re-Christening as The European New Deal in imitation of Roosevelt’s New Deal that presumably pulled America out of the crisis and decreased substantially unemployment, they seem to be unaware that the ‘boom’ between 1933 and 1937 still occurred in conditions of depression as unemployment was still at the level of 15% and the depression only ended with America’s entry into the war as a result of the preparation for the latter and as the unemployed were recruited in the armed forces to fight the axis powers on the seas and beaches of the Pacific and on the deserts and fields of Africa and Europe. Moreover, other countries in the depression recovered more quickly than the U.S.A., for example Canada, as during the Hoover administration, from 1930 to 1933, U.S. unemployment was on average 3.9 points higher than Canada’s unemployment and during Roosevelt’s New Deal, from 1934 to 1941, unemployment on average was 5.9 points higher than Canada’s. But it was one of the greatest economists in America Joseph Schumpeter who passed his withering judgment on the New Deal when he blamed it “for the fact that the U.S.A. which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery.”

The quackery, however, of their MP lies in its implied claim, after the multiple malinvestments, non-investments, and the gargantuan increase of the inefficient public sector and profuse consumption on credit all of which economically devastated the landscape of Southern Europe, that the recovery of the European Union and its periphery can be achieved without pain. That is why they are silent about any structural reforms and the privatization of the public sector, and the need of increasing competitiveness--which are primal conditions for any sustainable recovery--that inevitably involve severe pain for the majority of the people, especially in conditions of depression. But this is understandable as to admit the necessity of pain would shatter their wish and fanciful fantasy to live in the best of all possible painless worlds, and thus would debunk them from the comforts of an idyllic existence on an earth bound paradise.

Furthermore, and this is the most important factor, the crux of their MP is based on an assumption, whose chances of being realized is infinitesimally small, that the issuing of bonds by the ECB and the European Investment Bank (EIB) will be bought by public and private institutions as well as individuals to the degree necessary so the former can fund their programs and thus start the roll of the recovery. It will be hardly reassuring to these institutions and individuals however, to know that their money will be invested in countries of the European periphery with their chronic record of being economically underperforming and default looming is the order of the day. Who would be willing to invest in a seat on the Titanic? It is easy to buy bonds during a time of prosperity but is it as easy to buy them in conditions of economic crisis when there is greater uncertainty about future prospects? Moreover, what reassurance and confidence will render to the public a clause of “super-seniority status” that clearly adumbrates a high probability of “hard default?” It is precisely in highly risk conditions that such clauses are necessary. And once one inadvertently flags such a high risk one turns the market more bearish and scares members of the public from purchasing bonds. In such conditions Keynes’s “liquidity trap” reigns! So what is the fate of the MP, if the bonds purchased by institutions and the public are not adequate in number to finance the grandiose scheme of a European New Deal, other than its inglorious burial! And what will happen to Yanis Varoufakis? Will he abdicate from his vocation as an economist and enter successfully another profession, such as futurology, to compensate for his failure as an economist?

Lastly, what real resources other than artificial ones, such as the printing press and inflation, have the ECB, the EIB, and the European Stability Mechanism for launching a program of such huge dimensions? These are the questions that make the scientific validity of the Modest Proposal dubious. And these unanswered questions by the sires of the MP turn the latter intellectually untouchable to serious economists.

What is Needed for a Recycling Mechanism to Start?

A reply to Professor Varoufakis on his proposal of a recycling mechanism from countries with surpluses in his talk to the OECD.

By Con George-Kotzabasis

The working of a recycling mechanism from countries that are in surplus would primarily need the physical stature of Professor Varoufakis, that is, lean efficient competitive economies with no wastage baggage and lean governmental apparatuses. Most economies, however, of southern Europe are in a state of pathological obesity in both regards and thus are being unfavourable turfs for surplus countries to plough their money into them. For the wheels of the recycling mechanism to start therefore, it would be necessary to fundamentally restructure the economies and governments in the former case, on the ethos of a competitive market economy, and on the latter, by removing the destructive policies of government intervention and excessive regulation in the sphere of private enterprise.  Only countries free from the deleterious effects of un-competitiveness and government dirigisme and replete with entrepreneurial dynamism acting within a private enterprise system can be favoured to be the recipients of the manna of the recycling mechanism.

The above argument is reinforced by the two historical examples in Professor Varoufakis’ presentation where he shows that the Americans at the end of the Second World War recycled the major part of their surplus to Germany and Japan, the two countries that were renowned for their economic efficiency and technological feats and operating within the private enterprise system, and the second, when China and the oil producing countries of the Arab peninsula recycled their surpluses to America on the basis of the same principle, that is, of economic prowess and competitiveness. In neither case were these surpluses recycled to “Africanized” economies. Likewise, why European countries, such as Germany, that are in surplus, should recycle the latter to the economically sclerotic countries of the south unless the latter engaged in a radical restructuring of their economies that initially would be followed with a lot of pain as Greece presently shows with the radical changes that are taking place in its economy under the robust and imaginative Samaras government? It is easy to talk about the misanthropy of the elites but what about the misanthropy of those politicians of the left, such as Andreas Papandreou, who for years created a false prosperity for their peoples without telling them of the heavy price and suffering they would have to pay for it and the great crisis that they would be engulfed in?

Can Professor Varoufakis envisage that the great foundational changes that are required, so the recycling river of funds will inundate those countries that are at the bottom pit, can occur without pain? Is the Heracletian profound maxim that out of “great discord rises the greatest harmony” to be negated by the votaries of the “dismal science”?

Guest (Xenos) says,

Incorrect, in every way and on every level.

Per capita, Greece received more than any other country from the Mashall Plan and other forms of financial assistance from the USA. Germany and Japan received the most because (a) they were the largest countries lined up to receive funds, and (b) because they had been decimated by the war. It had nothing to do with your homespun nonsense about “Africanised countries” — whatever you think those might be.

Your speech is nothing more than empty rhetoric and has no relation to historical reality or economic analysis.

Kotzabasis says,

Greece was a special case due to the civil war and the threat of a communist take-over and the fact that America replaced Britain as the plenipotentiary of Greece and its protector from communism. And it goes without saying that part of the reason why funds flowed to Germany and Japan was their devastation. But the major reason was that the Americans wanted to create a locomotive of economic development in these two regions and that is why they chose Germany and Japan renowned for their past economic prowess. Professor Varoufakis himself in his presentation makes it quite explicit that China invested its surplus in the United States precisely because of the latter’s high competitiveness (M.E).

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Professor Varoufakis' "Invincible Summer" in the Midst of Difficulties of the Cold Winter of Past Year

By Con George-Kotzabasis

Professor Varoufakis, let us hope that the New Year is a year of corrections of past mistakes,  mea culpas and success. With the more than possible policy success of the Samaras Government in 2013, it seems to me that your “invincible summer,” policy wise, is a will-o-’the-wisp and will turn out to be your ineffable “winter of discontent” as a result of the political and economic triumph of Antonis Samaras in pulling Greece out of the crisis, and your dire predictions of the hopelessness of Greece, as the present government continues, according to you,  to implement, without creative revision, the dead end policies of the European Union and the IMF, which have been so destructive to Greece.

A reply to a critic who lambasted me for the above comment on Professor Varoufakis.

It’s not in my character to insult anyone and least of all our morally and mentally robust Professor Varoufakis. You are confusing “no quarter will be given” criticism with insults; the typical confusion of an effete person delving in critical matters or in intellectual discourse. As to the rest of your comment, it’s wise to take the advice of Wittgenstein and stay silent. The same applies to all other comments to my riposte to Professor Varoufakis.

 

 

A Response to Professor Varoufakis's Thesis that the Greek Economic Crisis is not Home-made

By Con George-Kotzabasis

Professor Varoufakis, we have crossed swords before several times on your website but no blood was spilt. Your thesis delivered with panache was highly interesting, provocative, fascinating, and alluring, but from a negative point of view. Like an exotically seductive woman flaunting dissolutely her charms but refuses to be seduced. You likewise refuse to see or acknowledge that your proposition is made-up from a selectivity of facts and by leaving other facts out you let down your guard as these neglected facts will release the Aeolian winds to demolish your argument in one wind gust. The fact is that  there are many countries within  Europe that are not in crisis, such as Sweden, Denmark, Holland, Luxemburg, Austria, and Finland, not to mention others. My question therefore is why the European and global crisis did not also embroil these countries in it as well, as it did with Greece and other southern European countries? Why the general predatory capitalist practices of the dominant countries of the Eurozone affected only some countries of the EU and not others?

The reality is that government dirigisme and its ill-fated profligacy of over spending on borrowed funds was the cause of the crisis that engulfed those countries of the south, and especially Greece, within the whirlpool of sovereign debt. The virus of the malaise did not have exogenous origins, as you wrongly suggest, but originated from the mal-practices of socialist governments and followed inevitably by conservative ones—how else could they have a chance to be elected in government?—with their fatal predilection for big government, and Greece was the example par excellence.

But as we all know a crisis is a developmental process and during its course the remedies applied to it particularly when they are wrong can exacerbate it instead of curing it. And as you correctly point out austerity without economic growth, especially in conditions of continued recession, is a recipe of disaster, as the statesman Antonis Samaras also pointed out two years ago. But it is a grave mistake to confuse the cause with the remedy and to build one’s case on the wrongness of the cures, as encapsulated in some of the policies of the two Memoranda imposed by the European lenders upon Greece, as the cause of the crisis in Greece.

In my judgement therefore your thesis that the crisis in Greece has exogenous origins and not endogenous ones is totally wrong and highly misleading. You are peddling shoddy goods wrapt-up in the dignified robes of academe hoping to make an easy but intellectually disrespectful sale. And the strength of your argument can be measured by the kind of opponents you have had in your debates up till now. None of them were real opponents and all of them were fellow travellers sailing with the compass of your ideological position. I remember when you met a real opponent to your thesis you banned him from your website, and I was rather surprised at the time that with your Kazantzakian character you would have debarred someone expressing opposing views to your own. But it is easy to be right when you hear only your own voice.

Also, your recycling theory from countries with surpluses to countries with deficits is in my opinion fundamentally flawed. What prudent investor would invest on a seat in the Titanic? Most of these countries that have incurred those bottomless deficits were and are economically uncompetitive and this was the primal reason why they were embroiled in this abysmal “balance of payments crisis,” as the eminent financial commentator Martin Woolf argues.

The crisis is profoundly complex to be fixed by tailor-made academic economic nostrums as your Modest Proposal suggests. It will be resolved by the method of science, i.e., by trial and error, and that is why, moreover, will not be without pain for the majority of people, after the grave and fatal errors committed by their past governments. The Schumpetarian principle of “creative destruction” will be the pivotal characteristic in this process of economic restructuring, and statesmen of the calibre of Antonis Samaras will play a decisive role toward its resolution.