Thursday, September 26, 2013

Mean-Spirited Policies, and Meaningless Numbers

-- Posted by Neil H. Buchanan

In my new column on Verdict today, I argue that the reelection of Angela Merkel as Chancellor of Germany is bad news for everyone.  Basically, I argue that austerity and the euro are bad, and Merkel is the most powerful champion of austerity and the euro, so Merkel's reelection is bad.  Q.E.D.

I do allow for the possibility that Merkel could yet see the light, but I deem that unlikely.  I also note that she is hardly alone among German political and economic elites in her views on these issues, because the policy community there has learned the wrong lesson from the rise of Hitler.  They think that everything rides on preventing a return of hyper-inflation, and they are willing to inflict extreme pain (on other people, of course) to prevent placing even the tip of one toe on what they view as an impossibly slippery slope.  For some reason, they do not think that mass unemployment (especially when it is caused by powerful foreign governments) raises serious concerns about political extremism getting out of control in European countries.  It is scary to see German leaders blithely ignoring the neo-fascist movements that are rising in neighboring countries.

Beyond my now-standard argument against austerity, the column includes two arguments that I want to expand upon here.  First, I develop an argument that fellow Dorf on Law blogger Bob Hockett posted as a comment on my DoL post on December 12, 2011.  I had argued in that post that the Germans were imposing ruinous conditions on the poorer and weaker nations of the euro zone (especially Greece), and that this was short-sighted and cruel.  Professor Hockett pointed out that the Germans' holier-than-thou attitude was also simply absurd, because their economic success derived directly from the problems faced by the Greeks, the Italians, the Portuguese, the Spaniards, and the Irish.

How does that work?  Essentially, the Germans and their supporters (Finland, Austria, et al.) are saying, "We were virtuous, and we will not reward vice."  The implication -- actually, the direct statement -- is that the weak countries are weak because of their own inability to rein in their excesses.  Germany emerged from economic weakness "on its own" in the last decade or so, supposedly because the people were willing to work hard and not expect a handout.  Maybe they did not expect a handout, but as Professor Hockett's argument suggests, they were certainly willing to rig the game so that they could simply take food out of the mouths of their poorer neighbors.  Germany's exports are being subsidized by being priced in a currency that is weaker than a German-only currency would be.  Without the problems of Greece and the rest, after all, the euro would be stronger, and German exports less competitive.

In its way, this argument is a variant on what is now often called the Murphy/Nagel point, named for the philosophers Liam Murphy and Thomas Nagel at NYU School of Law.  The basic idea (which both authors readily concede precedes their writing on the subject) is that laws set the framework within which economic outcomes are determined, and different sets of laws will dictate different economic outcomes.  For example, if I live in a country with strong antitrust enforcement, economic outcomes will be different than they would be in a country with weaker or nonexistent antitrust laws.  In both cases, the respective economic winners will be tempted to declare themselves the virtuous examples of how hard work guarantees success, even though their success was made possible by the laws that their societies created and enforced.  In the case of the euro, the Germans not only benefited from the law, but they were mostly responsible for creating and enforcing it.  To call their self-congratulatory moralizing deluded is to put it mildly.

The second argument that I want to discuss here pertains to Merkel's "7/25/50" line.  Earlier this year, when I spent a month teaching in Austria, a scholar there approvingly mentioned to me that Merkel had been making the following argument: Europe has only 7% of the world's population, and produces 25% of the world's output, yet it accounts for 50% of the world's social spending, making it necessary to cut social spending.  I smiled and changed the subject, because I had to believe that the argument had been mangled in translation.  In fact, as I note in my Verdict column, that is exactly what Merkel says.  She somehow uses that concatenation of statistics to argue that European social spending is "unsustainable."

How meaningless is Merkel's claim?  I compare it to the silly "9/9/9" plan from Herman Cain, calling Merkel's claim "not quite as inane."  (I actually remembered Cain's plan incorrectly, calling it the "6/6/6" plan in my column.  I've decided not to have that changed on the Verdict site, because it is just too funny as a Freudian slip.)  Actually, however, Cain's plan was at least meaningful on one level, in that he was simply saying that he wanted to set three key tax rates at 9%.  It was a stupid plan, but the three numbers communicated something.  Another famous triplet, "Fo'! Fo'! Fo'!" succinctly communicated basketball great Moses Malone's prediction that the 1983 Philadelphia 76ers would sweep all three best-of-seven rounds of the playoffs and win the NBA championship.  (He was off by one, but "Fo'! Fi'! Fo'!" never took hold in the public imagination, for obvious reasons.)

Merkel's line, by contrast, tries to suggest that the first two numbers somehow expose the unsustainablity of the third number.  It echoes the claims by environmentalists regarding the disproportionate share of the Earth's resources used by rich countries.  (For example, "Americans constitute 5% of the world's population but consume 24% of the world's energy.")  But that juxtaposition, too, actually communicates something meaningful.  What is Merkel saying?  At best, her claim amounts to an argument that an economy cannot spend more on social welfare spending than other economies and still compete with them.  "If we keep allowing people to retire in dignity, and provide child care for working families, and so on, other countries will be able to charge lower taxes and out-compete us."

This, of course, is simply an argument for a race to the bottom.  Moreover, it ignores reality.  The countries with no social spending (which make Europe's share of social spending look so large) generally have not competed well with wealthier countries.  And the few countries that do have success soon face demands for more social spending.  If one gives Merkel the full benefit of the doubt regarding what her three numbers might be meant to prove, history has emphatically proved her wrong.

The essential point, however, is that Merkel is merely putting numbers next to each other and then acting as if she has done something profound.  Politicians, of course, do this all the time.  John Boehner argues that there has to be a dollar of budget cuts for every dollar of increase in the debt ceiling.  He even calls this "the Boehner Rule."  Again, he simply puts two numbers next to each other and acts as if they are somehow logically connected, even though the annual amounts of spending and the total amount of government debt are similar only in that they are measured by dollars.   (I have not bothered to work out whether there is a long-term equilibrium level of debt that would result from applying the Boehner Rule every year, but if there is one, it would have no economic justification behind it.)

Even so, this could be fun.  Republicans constitute 28% of registered voters.  Women currently hold just over 4% of Fortune 500 CEO positions.  Early child education pays off $16 every dollar invested.  28/4/16.  We all know what that means!