January 12th, 2014
in Op Ed
by Dirk Ehnts, Econoblog101
We are into 2014 and many commentators have drawn parallels between 1914 and 2014. I think that this is not a good idea. The economic situation before WW I was not like the one we're in now. The world economy 2014 is much more like the world economy in 1931. Economic theory based on the market guiding us towards equilibrium is standing in the way of economic policy; economic and social hardships are imposed on wide parts of the population in the name of some abstract ideas.
Hopefully, 2014 will show us that we have to reverse course. Japan and Greece could make a fresh start in their respective situations. Japanese prime minister Shinzo Abe reveals his plans on Project Syndicate:
The year 2013 saw the Japanese economy turn the corner on two decades of stagnation. And the future will become even brighter with the appearance of what we are calling the "wage surprise."
Intensive discussions since September among Japanese government, business, and labor leaders have been geared toward setting in motion an upward, virtuous cycle whereby increased wages lead to more robust growth. [...]
Let's face it. Deflationary pressure in Japan - and only in Japan - has persisted for well over a decade. At the beginning of my premiership, I launched what observers have called "Abenomics," because only in my country had the nominal wage level remained in negative territory for a staggering length of time.
The economic policy is clearly Keynesian, with an increase in nominal demand created by higher wages that should lead to higher inflation and thus improve balance sheets for debtors all around, households and firms. This creates an incentive to take on more debt and might counteract the fear of credit that has been caused by two and a half decades of economic stagnation. If this policy succeeds, neoclassical economists will be scratching their heads. Weren't lower real wages supposed to create employment? Yes, according to neo-classical theory they were. This policy has been imposed on European countries by the troika in the name of growth. It would be a wake up call for European policy makers to see that countries that let their wages increase have more employment as a result, not less. The current account of Japan is very positive, so the balance of payments is no problem there but it would be one in Greece. Nevertheless, the Greek government officials have officially voiced their concern about austerity policies, as The Guardian reports:
Following four years at the sharpest end of Europe's debt and currency crisis and €250bn in bailout funds, the Greek government declared enough was enough.
"Greece does not want to have any more fiscal conditionality," the finance minister, Yannis Stournaras, said on Wednesday. "It is out of the question because it is already too tough."
The cry of exhaustion from a country that went broke, sank into years of slump and mass unemployment, slashed labour costs, and saw incomes collapse by more than a third is finding an echo not only across southern Europe but in the prosperous north, too, as leaders fear for their career prospects.
The political situation for the ruling parties - former heavyweights Nea Dimokratia (ND) and PASOK - is clear. As Nachdenkseiten reports, conservative ND is now trailing left of center Syriza while socialist/social democratic PASOK is fighting for survival (more than 3% of votes are needed to enter parliament). It seems that even thought the financial markets are stabilized, the economy is not. A solution to the current economic problems will play out in the political arena if economic policies are not changed.
To make that happen, economic theory must be changed to account for the facts. In 2014, four years after the Greek sovereign troubles broke out and about seven after the burst of the Spanish and Irish real estate bubbles, there is still a lot to do in terms of educating the public. Der Freitag, a German weekly, has announced a Wirtschaftsteil (business news) starting in 2015. Let's see how far we get in 2014.