Economics

Roger Bootle’s prize winning advice to the Greeks: sit still while we rob you!

This summer Roger Bootle won Lord Wolfson’s £250,000 prize for the best advice for a country leaving the European Monetary Union (one may assume that this advice is aimed at Greece).  A more statist, anti-liberal policy than his could hardly be envisioned, which is a sad commentary on the mindset of the judges chosen by Lord Wolfson.  His advice contrasted sharply with that of Dr. Philipp Bagus, whose liberal, transparent, and free market-oriented policy advice was rejected in favor of Mr. Bootle’s call for state secrecy and coercion.

Mr. Bootle’s statist advice stems from his misunderstanding of basic economics in which he views symptoms as causes.  He offers no explanation for Greece’s unsustainable debt burden, high cost structure and high unemployment other than the standard Keynesian explanation of inadequate aggregate demand.  Once this fallacious view is swallowed, the prescription follows axiomatically; i.e., devalue the currency to restore competitiveness vis a vis foreign markets, which will increase aggregate demand and reduce unemployment.  Oh, and the Greeks may have to default on their foreign debt, but history shows that this is not a problem.  Really?

Despite his lengthy and repetitive prize submission, Mr. Bootle’s recommendations can be summarized in this one sentence:  In complete secrecy and with no prior discussion, redenominate all Greek euro-denominated bank accounts into Drachma-denominated accounts and devalue the Drachma.

That’s it!  There is no need to cut public spending.  Quite the contrary, because public spending adds to the Keynesian concept of aggregate demand, and aggregate demand cannot be allowed to fall.  The secrecy part is essential for Mr. Bootle’s plan.  If the Greek people got wind of what was to happen, they would take measures to protect their property, such as transferring their euro-denominated bank balances to banks in Germany.  Mr. Bootle refers to such a development as a crisis, but a crisis for whom?  Taking measures to protect one’s property would not be a crisis for the common Greek citizen.  It would be exercising rational self interest.  Mr. Bootle’s so-called plan is nothing more than robbing Greek citizens in the middle of the night!

Give the Greeks a Better Currency

The aim of currency reform–and, do not mistake my intention, currency reform IS needed–should be to replace a poor currency with a better one.  But Mr. Bootle (and his Keynesian colleagues) see the world upside down.  In their world of aggregate demand, a weaker currency always is preferable to a stronger one, because a weak currency purportedly makes a nation more competitive in international markets.  But this is pure propaganda.  A weak currency not only makes necessary imports more expensive, reducing prosperity, but it also is an outright subsidy to foreign buyers of a nation’s goods.  As I have argued in my essay Value in Devaluation? and as James Miller has argued in Mark Carney’s Zero-Sum Game, currency devaluation is merely a transfer of wealth from all of a nation’s citizens to politically favored industries, usually export industries.  It is no different than giving a subsidy to any domestic producer.  The subsidy is paid by all the citizens of the subsidizing country, not by the foreigners who buy the subsidized good.  They get a bargain.

Furthermore, devaluation does NOT make a nation more competitive.  It does nothing to spur increased domestic saving or external capital investment which lead to the increased application of capital per capita, the only sources of increased worker productivity and the only sources of increased real wages.  Devaluation does not reveal the onerous, wealth destroying effect of economic regulation, not does it reveal the true costs of the welfare state, which relies upon high taxes to fund present consumption at the expense of future prosperity.  What the state spends cannot be saved and invested, no matter how cheap the currency.

And, contrary to Mr. Bootle’s statement that “improving competitiveness is at odds with the objective of reducing the debt burden”, Greece will not be able to reduce its debt until it does become more competitive.  It may well be impossible for Greece to pay all of its debts, but this merely reveals the dire reality of current policy; it does nothing to change that reality.  The increase in the debt burden must stop!  It must stop now!

Mr. Bootle misses the cause of the euro debt crisis completely when he fails to see that ECB euro-denominated loans to captive national banks, with worthless sovereign debt as collateral, is the manner in which the European Monetary Union subsidizes failed economic policies.  As long as the Greek government can get unlimited euro loans from the ECB, there is no real reason to reform the nation’s economy and there will be no end to the debt crisis.

So, Mr. Bootle proposes an even WORSE currency, a devalued drachma, as the replacement for a bad one, the euro.  And if the Greek people resist outright theft through devaluation, then the government must trap their wealth internally, where it can be plundered later, by using capital controls to stop euro transfers to safer, foreign banks.  The fact that the free movement of capital was one of the pillars of the European project apparently must be sacrificed for the benefit of the state.  In fact Mr. Bootle admits that capital controls are illegal under current EU law, but he recommends them anyway.  All tyrants love a crisis, because it can be used as an excuse to break the law!

Truly Liberal Alternatives

Dr. Philipp Bagus of King Juan Carlos University, Madrid offered the truly liberal alternative.  He proposed a long period of public discussion about alternatives to leaving the euro, which would allow ample time for Greeks to move their property out of the greedy reach of their own government, should they decide to do so.  The currency crisis might be solved in this manner as Greek banks closed and the Greek government shut down its welfare and regulatory system for lack of funds.  The Greek government could repeal legal tender laws which currently require Greek citizens to transact business in one currency only, always that issued by the state itself.  Concomitantly it could reinstate the drachma as a strong currency backed by gold.  Then good money would drive out bad, as people freely chose which currency to use.  They would choose the one that is most marketable.  One element of that marketability would be that it would retain its purchasing power.

Of course, Mr. Bootle desires the opposite; i.e., an ever depreciating currency that robs currency holders of their purchasing power.  Naturally Greeks will resist this, therefore, the Greek government must install capital controls.  Yet, the essence of self-government and democracy and the great triumph of post war Europe was the freeing of the individual first from fascist tyranny and then communist tyranny, whose primary means of enforcement were control of the economy.

The future of Europe will emerge from the euro debt crisis.  Mr. Bootle desires a return to state currency controls as a means to prop up the decaying welfare state.  Dr. Bagus desires a step back from this unfortunate detour that took concrete form with the formation of the euro.  Rather than compound the errors of the euro with even more state intervention, the alternative is to anchor currencies in gold.  This will force individual nations to engage in true democratic processes to determine the scope of state action.  It will end the stealth transfer of wealth via euro monetary expansion.  In that regard it will force each nation to live within its own means.  What’s wrong with that?

7 comments to Roger Bootle’s prize winning advice to the Greeks: sit still while we rob you!

  • Paul Marks Paul Marks

    The Greek Welfare State and labour market regulations are not sustainable. Defaulting on their debt (the government has basically defaulted on its private debts already) and printing local currency (“devaluation”) will not change that.

    Greece needs to return to the taxaion, government spending levels and regulations it had in the 1950s. 1950s Greece was certainly not a pure free market – but government was far more limited (in size and scope) than it is today.

    “We can not return to return to the size of government spending and the scope of regulations that existed in the 1950s”.

    Then you will starve. Not today, not tomorrow – but you will starve, and you will starve soon.

    • Strikes me that Greek labour market regulations and welfare state are perfectly sustainable, just as long as they accept the reduced disposable income that implies. Their trouble is that they refuse to accept that reduced disposable income. That’s why they’re in debt. (And before anyone jumps to the conclusion that I want to see Greek style regulations and a bloated welfare state in the UK, I don’t.)

      I don’t think they need to reduce themselves to “starvation” levels of disposable income to live with their regulations and generous welfare state (whether inside or outside the ES). But they do need to accept a good 10% or so reduction.

  • john in cheshire

    I wish I could be given a quarter of a million pounds (or even euros) for telling people what they want to hear. Perhaps I should relocate to Delphi.

  • Paul Marks Paul Marks

    John – Delphi, although Sparta (Sparti) is supposedly the most conservative town in Greece.

    The old Sparta is often oversimplified – people know of the full Spartans (the military caste) and the oppressed Helots, but other large segments of the population are ignored. And I am not thinking of the two Royal families (neither of which was part of the collectivist system that produced the military caste).

    The “dwellers round about” (almost ignored by most writers) who were not Helots and were not part of the military caste. They owned farms in the hills, or trading operations in the port (oh yes “land locked” Sparta had a port) and made things(were artisans).

    “But they did not fight” – actually they did. They made up a very large part of the Spartan army.

    What proportion?

    Who knows? As writers (now as well as in the past) seem totally uninterested in these free people – although it from they (and from the Helots) that modern people in the area come. The special military caste, for reasons I will not go into, do not seem to have been very good at producing children – and became fewer and fewer over time.

  • Paul Marks Paul Marks

    I meant to write “Delphi is a nice place” – oh well I am tired.

    Ralph – you are making an error.

    No insult meant – a lot of very clever people (much more intelligent than thee or me) made the same error.

    You are thinking of labour market regulations and the Welfare State as static things – things that one can pay for (in terms of lower income).

    Actually they are dynamic things (like cancer) – labour market regulations (whether in Greece or Italy or Spain or…..) do not just cut incomes – they progressively (i.e. over time) push unemployment higher and higher.

    And the entitlement programs do not have a fixed cost either – once the committments are made the costs progressively increase (they must do – by their very nature).

    “But that means death” – of course it does.

    That is the reason why Ludwig Von Mises titled the last section of his work “Socialism” (the section where he examies interventionism – promising people X, Y, Z by government edict, and destroying such things as functioning labout markets) “Destructionism”.

    Forget Greece for a moment, how about Spain? How can a nation function with 25% of its working age population on the dole? And this is a the peak of the phony “boom” (when the ECB, Bank of England and American Federal Reserve are all pumping our new credit money as if there was no tomorrow – and, thanks to them, there will indeed by no tommorrow).

    Mises was not the only one to warn about this. F.A. Hayek (in “The Constitution of Liberty” 1960 – i.e. before the Greek Welfare State was really established and when most of the present labour market regulations did not exist) warned, that the way the Welfare States were going, society would start to fall apart in the early years of the 21st century.

    “You are contradicting yourself Paul – you say that the Greek mess did not really exist in 1960, yet you also say that Hayek predicted that the Welfare State, and the rest of the interventionism, would start openly tearing society apart by the early years of the 21st century”.

    Hayek was not talking about Greece – he was talking about Britain.

    And he will be proved correct.

  • john in cheshire

    Paul I was trying to be ironic, haha. Wasn’t Delphi the place where the oracle kept house? And didn’t the oracle tend to tell people what they wanted to hear. Maybe it was a weak metaphor.

    • Paul Marks Paul Marks

      I am sorry John – of course you were being ironic (and there was nothing wrong with the metaphore).

      I am very tired – I have been busy for the last few days (work stuff), so little time for sleep thing, and when I try and catch up with my e.mails I found lots of “Libertarian Alliance” stuff – “social justice” down-with-corporations and on and on.

      It is like a direct line to Hollywood, or university campus, style politics – it makes me want to throw up.