More on the EU crisis

This is a very informative piece on the course of the EU crisis. Hat tip to Jurriaan Bendien for emailing it to me.

My big quip to the piece is that it suggests that the key to the re-balancing and recovery of the European economy (with growth that benefits working people) hinges on Southern and Eastern Europe increasing their exports to Germany, France, the UK, and the rest of the world.  

No.  That is a recipe for a depression.

The key to a prompt recovery is outright wealth redistribution in favor of working people (via a mix of mechanisms, from aggressive “stimulus” spending to IMF-suggested inflationary monetary policy to the public insurance of the private debt of working people to confiscatory punishment against financial fraud), something that won’t happen unless Europeans raise hell on the streets, and the EU institutional framework is reshaped.

To put it in ways my macro students will understand:

Y = C + I + G + (X-M),

Over the very long run, you cannot expand the economy of Southern and Eastern Europe by increasing (X-M), because the sum of (X-M) across all countries is zero.  It’s beggar thy neighbor!  Even in the not-so long run, this won’t work. As global exporting powerhouses, Southern and Eastern European countries are no match to China and Southern Asia in general, with their still huge reserves of labor, scale economies, etc.

Progressive wealth redistribution (beggar thy plutocrats!), on the other hand, allows for more sustainable growth over the very long run (without further economic degradation), if for no other reason because working people have a larger marginal (let alone average) propensity to consume.

The sooner people on the streets realize how wide the actual scope of political possibilities is, the better.


  1. Your formula concerns the components of expenditure on GDP. But although this is not yet recognized much in the textbooks, in developed economies the value of capital assets not tied up in production is now significantly larger than the capital assets directly invested in production. These non-productive assets include both physical assets, e.g. real estate (now worth more than total production capital) and financial assets such as equities and debt securities. As a corollary of that, a hefty chunk of income is created in the form of interest, rents and capital gains which includes income that is not defined as factor income, but as property income of some sort, and therefore to a significant extent excluded from GDP measures of primary income. It is certainly true that value-adding production is in the last instance the only way to pay debt off, i.e. there must be an increase in net assets, which requires an increase in net output. But what this ignores, is a buoyant international trade in already existing assets, which also generates incomes that are in part excluded from GDP, because unrelated to production. And therefore I think your formula ought to be read with some caution. I calculated once that in the US, realized capital gains for tax purposes alone amounted to 6.5% of US GDP in the year 2000, at the high point of the boom. But such a figure excludes capital gains which are not subject to tax, and also excludes capital gains which are as yet “unrealized” because the assets have not been sold. A similar story can be told about interest and rents. At a guess, there’s an amount of earnings in excess of $2 trillion which is in fact not included in GDP, because unrelated to value-adding production or to factor incomes. National accounting systems do recognize that, aside from the primary circuit of factor incomes there exist also secondary circuits. But the presentation of these secondary circuits is often not systematically done (although in the US you have FoF tables), and the categories used are not really very suitable in many respects in an era of “financialization”. That aside, there are substantial definitional problems these days in measuring intermediate expenditure, problems of which Simon Kutnetz incidentally was well aware, which impact on the magnitude of the GDP estimate.
    Theoretically speaking, the ambiguity of capital accumulation is that it can involve either an increase in aggregate net assets or a transfer of ownership of already existing assets. In other words, you can get richer by producing more than there was before, but also at the expense of some other party. Accumulation may involve a net gain in assets, even if the gains are unequally distributed, but also a transfer of assets without net gain. I think this is often insufficiently noticed in macroeconomics, in part because of the categories it uses. As regards exports, the exports of goods and services by a country like Greece are only about 6% of its GDP and the value of its imports is three times as large as its exports. Thus, there is no way at all that Greece can easily export its way out of difficulty. Economically far more significant than its international trade in goods and services is the country’s international trade in capital.

  2. Michael Hudson comments:

    The upshot is that governments measure wages and corporate profits, but have only the roughest estimate of wealth, its distribution and rate of growth. Only Japanese statistics have good measures of land prices. No national income statistics today measure the most important asset on which classical economics focused: unearned income and unearned wealth.

    The concept of GDP is thus affected by a double problem: on the one hand, financial “services” which only transfer wealth from A to B are counted as an “output” which can amount to a third of the annual value. On the other hand (and this is less wellknown, and which nobody believes when I point it out to them), it excludes by definition a sizable fraction of national incomes because those incomes are not directly related to production.

    Now, whereas GDP may be a valid and useful measure as far as it goes, it does not in any way describe accurately what incomes are actually received by the residents of a country.

    This surely has a major impact on how we should think about the propensity to save and invest, and about the distribution of income.

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