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 A Deep Contrite Apology to the people of Greece

By Shlomo  Maital


      Greece’s new prime minister Alexis Tsipras has been sworn in and vows to lead an anti-austerity coalition.   He could possibly lead Greece out of the euro and back to the drachma.  This would be unspeakably painful for Greece, in the short run, but possibly best in the long run.

      Meanwhile,  we economists all owe Greece an apology. We have caused immense suffering, needlessly, to 11 million innocent Greeks.  According to Nobel Laureate Paul Krugman, economists drafted the ‘troika’ agreement in May 2010, under which the IMF, European Central Bank and European Commission lent Greece money, in return for extreme austerity.    Greece had no choice in the matter. 

    This document assumed Greece would suffer only a small contraction in 2011 and by 2012 would be recovering.  Yes, unemployment would rise to 15 per cent (Would Merkel’s Germany ever accept such a scenario??) in 2012, but then it would fall rapidly.  Why?  Because austerity would work quickly, heal Greece’s economy, and restore growth.

    Really?  Did the troika economists ever find a single (just one! One!) example in history where austerity worked? 

    No. There are none.

    Instead, Greece suffered a depression, 28 per cent unemployment,  its young people migrated abroad, learning German for instance, and youth unemployment reached nearly 60 per cent. 

     Greece kept its part of the bargain, slashing public spending by 20 per cent.  But the promised benefits of austerity turned out to be disaster.  That is why Tsipras won the election.  And it is why the euro has dived.  The EU and its economists brought it on themselves. 

      It isn’t complicated at all.  To heal a budget deficit, you need a growing economy, because when the GDP grows, tax revenues grow much faster, 1.5 times faster.  To get a growing economy, you need spending and demand.  If people can’t spend, because they have no jobs and their wages are falling, only the government can take up the slack. But if you slash government budgets, the economy will shrink, not grow, and the debt problem will become even worse.  That is what ‘austerity’ does.   It’s pretty simple.

On behalf of my fellow economists, I would like to apologize to the people of Greece. We screwed up.  And worse of all —  none of those responsible seem willing to admit it. 

Iceland Leads the Way

By Shlomo   Maital   


  In the United States,  despite the fact that the global financial and economic crisis began there, and was caused by irresponsible actions by senior executives in the financial services industry, not a single banker has been sent to jail on criminal charges.  Banks have paid large fines for civil suits, but for the most part, those fines pale in comparison to recent profits. And to add to the insult – the Republicans have managed to modify the Dodd-Frank provision that keeps banks from investing in exotic derivatives (the kind that caused the problem in the first place). 

   But there is a country that has behaved differently.  Iceland,  with only 325,671 epople and 103,000 sq. km. in area.     Iceland has been independent (from Denmark) only since 1944.  Its banks were out of control in the first decade of the millennium and expanded irresponsibly.  The collapse following 2008 was massive.  Iceland had 20 percent inflation in 2008 and 8 per cent unemployment in 2010.  Its debts were huge.  But Iceland cleaned up the mess.  Bankers were sent to jail.  Iceland’s national debt was gradually reduced.  Iceland managed to maintain its social welfare system despite the enormous financial crisis. 

   According to an Icelandic economist,  “after the infamous crash of 2008, the Icelandic economy shrunk in 2009 and 2010. However, since 2011, the economy has been growing at a respectable rate, by 2.1% in 2011, 1.1% in 2012 and 3.5% in 2013. While purchasing power has yet to reach its pre-crash peak, and many families are still acutely aware of the crash when trying to make ends meet, the economy had safely exited recession.”  Lately, the economy has slowed.  And Iceland’s conservative government has practiced austerity, which in Europe has failed.   Despite this, little Iceland has emerged from a deep crisis that was worse perhaps than in any other country.  And without much help from anyone. 


IMF – Oops! We Got It Wrong!

By Shlomo Maital  



 The International Monetary Fund (IMF) was invented at Bretton Woods, NH, in July 1944.  It is headquartered in Washington, DC and its task is to bail out companies that get into financial trouble, overspending, overborrowing, etc.   And this happens often.

   The IMF is an exemplary organization. It has among the world’s best economists (its former deputy director was Stan Fisher, formerly head of Israel’s Central Bank, now Vice Chair of the U.S. Fed), and it even has an independent evaluation board that checks whether it has acted correctly.

   Now, this independent board has reported that..the IMF erred.  Ooops.

   Initially, when the global crisis broke out in 2007-8, the IMF recommended that governments support the economy, and indirectly its banks and financial institutions,  by using fiscal policy, i.e. deficit spending.  But then, the IMF switched direction, under pressure perhaps from capital markets, and said that governments should impose AUSTERITY,   cut spending, cut borrowing.

    Bad idea.  The independent IMF board said:  the IMF erred. It recommended austerity too early.  Perhaps, it should not have recommended austerity at all.

    It is sad when the world’s fireman, the world’s Mother Hen telling its chicks what the right thing to do is,  admits it blundered.  And sad when economics makes a mistake that is costly for hundreds of millions of people. 

It will be hard for even a serious body like the IMF to regain its credibility in future.

History Repeats Itself: Europe & the Extreme Right

By Shlomo  Maital

 Farage Nigel Farage, UK

 History DOES repeat itself.

  After WWI (whose centenary,  1914-2014, will soon be observed), the victors (Britain, France)  punished the losers (Germany) with outrageous demands for ‘reparations’, at the Treaty of Versailles.   J.M. Keynes was there; he warned, in a book The Economic Consequences of the Peace,  that the ruinous reparations would lead to a new war.  It did.  To pay the reparations, Germany simply printed marks. This destroyed the economy through ruinous hyperinflation, and led to the rise of the Nazis and Hitler. 

Today, Europe has adopted a misguided policy of austerity, forcing Greece, Spain, Ireland, and to some degree Italy, to adopt stringent spending cuts and tax hikes.  True, these countries overspent.  But the right way to emerge from excessive public debt is to grow the economy so the debt shrinks and so tax revenues help pay for it.  The wrong way is austerity – shrinking government demand, when consumption and investment and exports are all declining.  You cannot grow an economy by shrinking demand.  Yet many economists support ruinous austerity.   Did we forget what Depression did to Germany?  Well, it is doing similar bad things to Greece, Spain and other countries. 

   Now, it is time to pay the Piper.  The European Parliament elections have brought a huge victory for parties on the extreme right – Euroskeptics, neo-Nazi, anti-immigrant, and anti-Semitic.  It was inevitable.  When times are bad, people look to those who have simple remedies – blame the foreigners, the Jewish people, and Brussels.   

    I’m embarrassed and ashamed to admit I am an economist.  Not only do we economists fail to grasp reality, we have also forgotten history, and the warnings of the man who invented macroeconomics, J.M. Keynes.    

   If the neo-Nazis have risen in Europe, we have nobody to blame but ourselves.  

Practical Economics from Ray Dalio

By Shlomo Maital

          Dalio       Ray Dalio

  As an academic economist, I am highly critical of myself and my colleagues, whose theories offer no help or guidance to practical policymakers trying to make our lives better.  A recent NYT op-ed defends the common anomaly of Nobel Prizes awarded for conflicting theories, by saying that, well, economics is tough, we can’t do lab experiments. 

   In his “Dealbook” column, NYT writer Andrew Ross Sorkin (always worth reading) cites a new viral video on “practical economics”,  Dalio 101, by Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund ($150 b.), the man worth $13 b. who saw the financial crisis of 2008 coming and also saw the recovery coming.  Check out his 31-minute YouTube video (search on Ray Dalio  on YouTube).   Here are a few insights:

     Austerity:  why it doesn’t work.  When borrowers stop borrowing and pay off debt, debt increases, because spending falls; since one man’s spending is another man’s income, incomes fall, and the debt burden rises.  Simple?

    Borrowing:  why we get into trouble.    Borrowing is a way of pulling spending forward in time.  To buy something you can’t afford today, you borrow from your future self.  In doing so you create  a time in future when you need to spend less than you earn in order to pay it back.  But if you’re addicted to debt, that becomes hard to do.  (Compare: America the ever-borrowing country). 

   Lost decade:  It takes roughly a decade or more for debt burdens to fall and economic activity to get back to normal – hence the term ‘lost decade’. 

   Monetarism and Milton Friedman:  If money M times velocity V equals a price index P and real GDP Q,  then if velocity is constant, when you boost money, either P or Q or both must rise, increasing economic momentum.   The reason this doesn’t work, is that today there isn’t much velocity, it has slowed, and only we the people control velocity (the rate at which money circulates).  It doesn’t help to create piles of money if it those piles just sit there, with banks not lending and businesses not borrowing.

     Dalio 101.    You have to listen to someone who has used simple economics to make $150 b.


Deficit, Shmeficit: Get People Back to Work

By Shlomo  Maital  


    Tomorrow night my wife and I leave for a conference in Portugal.  Lately, social protests in that country have recurred, the finance and foreign ministers quit, and Prime Minister Coelho faced a disintegrating government.  He managed to avert it, narrowly.  The sign in the photograph tells it all.  Austerity kills dignity.  It is also killing Europe.

      Today’s Global New York Times reports that “fewer than 10 per cent of people surveyed in the European countries hardest hit by the region’s debt crisis say that their leaders are doing a good job at fighting corruption”, according to Transparency International.  “The results reflect a crisis of faith in government”, the report continues.  Half of the 114,000 people surveyed viewed political parties as the most corrupt institutions; half thought their governments are run by “special interest groups”. 

    According to the Portuguese member of the Transparency Intenational board, “the near unraveling of the Coelho government is an example of how focusing solely on the fiscal aspect of Portugal’s problems led to public frustration”. 

    According to the TI report, “19 of 25 European countries do not regulate lobbying at all.”  Big money buys big lobbies, which protect the moneyed interests.  And the people lose faith.

    The macroeconomics of austerity is truly simple.  People, without jobs or hope, stop spending.  Businesses, as a consequence, also stop investing.  Exports are down, as nations try to protect their home markets to export unemployment and their imports decline.  Result: The only source of growing demand is government spending. But under austerity, that too disappears.  It’s like all the air is let out of the GDP balloon, because there is no source of strong demand.

     Deficit, Shmeficit.   As Keynes said in 1936, in a Depression, governments must supply the demand.  When they do, confidence resumes, unemployment falls, and the economy picks up.  Governments can THEN tackle the deficit problem, which by the way cures itself as growth spurs tax revenues.  It’s so simple.  WHY don’t the rich European nations (i.e. Germany) get it? 

   Deficits can be fixed. But destruction of people’s faith in their leaders is much much harder to repair.  And without such faith, the low-key Depression, as Paul Krugman calls it, will go on, in Europe and in America.  And the people will continue to suffer and protest.   

*  Melissa Eddy, “Weary Europeans Lose Faith in Government,” Global New York Times, July 10/2013, p. 13.


Blog entries written by Prof. Shlomo Maital

Shlomo Maital