The Macroeconomic Ignorance of a Canadian CEO

What does a -successful – business man qualify to comment on macroeconomic issues? What drives a newspaper to publish a comment that lacks not only empirical and analytical understanding but also makes ideological prejudice to an argument? The answers to both questions are straightforward. Business men, successful or not, are living in a fancy bubble – fed by astronomic remuneration – that makes them believe they would have insights into outcomes that are the result of independent individual decisions made under institutional and historical constraints. Actually, there is no proof that would demonstrate that they really understand what macroeconomics is all about. And yet, they do not shy away from presenting themselves as insightful experts. Newspapers are complementary actors in the game. They like star power, and not least the star power of CEOs. Star power often trumps quality, and it seems as the editors are not really reading the texts they publish.

All this came into my mind when I read the piece by Gwyn Morgan on Greece and the Eurozone in the Globe and Mail (Published Sunday, Apr. 05 2015, 5:05 PM EDT Last updated Monday, Apr. 06 2015, 6:41 AM EDT)

Gwyn Morgan made his fortune by building a truly Canadian energy giant. No small feast but be reminded that this is mainly a rent-seeking activity that does not come with truly innovative actions and attitudes. Still, he was successful, and given the lack of Canadian CEOs with star power it is only natural that the Globe and Mail is proud to have him as a regular commentator on all kind of topics, including Greece. Most of the stuff I read over time is mainly driven by simplistic market ideology and not worth it to think twice – as most of the Globe economic comments. The difference this time is that Gwyn Morgan did not shy away from making the methodological backbone of his ‘macro thinking’ open:

Many commentators contend that the shrinkage of the Greek economy since the bailout spending-reform conditions were implemented demonstrates that austerity has failed. Reaching that conclusion requires denial of the fundamental principle of actions and consequences that apply to countries as well as families and individuals.

This fundamental principle is known to all of us: Never spend more then you earn (though, I may add that we may know it but on average don’t believe very much in this principle as the soaring credit card debt indicates). This rule, also known as the ‘Schwäbische Hausfrauenregel’ (Swabian Housewife rule, as German Chancellor Merkel likes to say), is as simple as it is misleading. What holds for you and me does not automatically hold for ‘countries’, i.e. the state. Governments have good economic reasons to spend more then they earn by tax receipts, in particular in situations of deficient effective demand or in order to provide essential infrastructure that pays-off over longer periods. Actually, private companies make use of credit markets and thus enter private credit opportunities in order to finance their investments. Credits or debts are at the very start of any successful private initiative.

There is no doubt that Greece is a badly managed version of capitalism. Greece’s long-entrenched dysfunctional governance, out-of-control spending, bloated and unaccountable public service, business-crippling bureaucracy and institutionalized corruption, as Morgan puts it in blunt words, is at the core of the current problems. One still can ask why private creditors were willing for a long time to finance such a regime? Would Morgan go so far and concede that banks were willing accomplices? And isn’t it a basic capitalist fundamental principle that banks are in the risk business? Rather then posing such questions Morgan goes a different route. The EU should cut Greece lose in order to save the Euro and more so to make for all times clear that voters should not dare any longer to elect a left government that wants to deal differently with the Greek malaise.

No surprise here as CEOs are not known to defend basic democratic values at any rate. Surprising is, however, how he manages to run over a rather sophisticated academic debate about austerity and its effects in order to come up with his verdict. Read this:

Despite receiving €214-billion in bailouts since 2010, the country’s debt has actually risen, now standing at some €340-billion. Hardly evidence of the alleged drastic spending cuts that have seen anti-austerity Greeks demonstrating and burning in effigy German Chancellor Angela Merkel, leader of their main benefactor.

If it needed a proof that Morgan has no clue what he is talking about then those two sentences from his Globe piece make the case. It is correct that Greece’s debt actually increased since the haircut, only because the so-called second program of the Troika added to the public debt load.Most of those funds were immediately channeled to rescue creditor banks. More important, all serious analyses agree that Greece made biblical efforts to cut expenditures, and all figures show cuts in equivalence of 12% of Greece’s GDP. Given that the fiscal multiplier is hovering around 1 and even higher for some expenditure-oriented measures, one can show that the cumulative effect of austerity since 2010 is between 25 and 28% of GDP. It needs quite a dose of ideological prejudice and ignorance to move across all the facts.

All this does not imply that there was no need to drastically change Greece’s state model. Austerity was unavoidable. However, the degree of austerity and its upfront speed are the problem. Stretching austerity and simultaneously renovating the Greek state and its tax as well as welfare regime would have been the way to go. We know that the former Greek conservative government had no interest in such kind of reforms. We are learning that the Troika was not interested in such a project either. And now we learn that a stubborn left-right anti-austerity government wants to investigate such a route but meets harsh resistance on the side of the creditors. How strange is that?