Tuesday, 20 September 2011

Rubbish from Nouriel Roubini.

For low grade drivel, this article by Roubini takes some beating. The article is an eight point plan to avoid a depression.

First, Roubini trots out a nonsensical piece of conventional wisdom, namely, in his own words that “First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output.”

The phrase “fiscal trainwreck” is slap-dash and imprecise because it fails to distinguish between the part of the deficit which is structural, and the part which is supposed to bring stimulus. I’ll deal with the structural part first.

Dealing with the structural deficit is child’s play. At least there are absolutely no technical difficulties that cannot be explained to an adult of average I.Q. in three minutes.

A structural deficit occurs when government fails to collect enough tax and resorts to borrowing instead. Reversing this process is easy: cut borrowing and raise taxes (or cut spending). There may be political difficulties in doing this, but there absolutely no technical difficulties. Moreover and contrary to Roubini’s claims, NO AUSTERITY need be involved. That’s because as long as the AMOUNT OF tax increase and borrowing reduction are such that the deflationary effect of the former equals the stimulatory / inflationary effect of the latter, there is no net effect. I.e. there is no net effect on demand, GDP, numbers employed, etc etc, i.e. NO AUSTERITY. (The issue is actually A BIT more complicated than suggested in the latter sentence, but the latter sentence is more or less correct.)

As distinct from the structural deficit, there is the “stimulus deficit”, that is the extent to which government runs a deficit with a view to doing some Keynsian “borrow and spend”. Well the alternative to borrow and spend, as Keynes, Milton Friedman and others pointed out is to go for “print and spend” (and/or print and reduce taxes). Again, as long as stimulatory / inflationary effect of the printing equals the deflationary effect of the reduced “borrow and spend”, then again, there is no austerity, no net effect on inflation, or GDP or anything else.

Roubini’s second point starts “while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity….”. No, monetary policy can have a substantial effect even given excess “debt and insolvency”. Here’s how: channel money into the pockets of middle and low income earners. They will tend to spend a relatively large portion of that money, compared to the elite.

The evidence is that when the average household’s income rises, its spending rises, fantastic as that might seem. The latter point will be blindingly obvious to the average mentally retarded snail, but it seems to way above the heads of economics professors (and not just Roubini).

Roubini’s third point is worth quoting in full (in italics):

Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential.

Well that’s great, isn’t it? Governments have already shafted taxpayers with a view to rescuing banksters. Now Roubini wants a few more trillion to be given the assortment of depraved fraudsters, spivs and conmen that make up Wall Street.

I’ve got a better idea: channel the trillions into household pockets and let a few banks go bust. Don’t close them down of course – just wipe out the shareholders, unsecured creditors, etc. Then have government wind down the relevant banks or sell them to the highest bidder. If the highest bidder for a bank bids $1, so be it.

Roubini is under the illusion that the only form of salvation for employers can come as a result of loans: that is having employers grovel in front of the above mentioned Wall Street fraudsters in the hope of getting a loan (or grovel in front of government bureaucrats in the hope of same). There is of course an alternative (mentioned above). That is simply to channel funds to households rather than banks. That way employers get the cash they want from customers rather than banks.

Fourth, Roubini wants big hand outs for European periphery countries. Well obviously that will solve the problem in the short term, but it does not solve the longer term problem of such countries’ lack of competitiveness relative to core countries. Moreover, German taxpayers are getting understandably sick of subsidising periphery irresponsibility. Rather than make fatuous statements about hand outs for the irresponsible, perhaps Roubini could solve a more difficult problem, namely how does Angela Merkel persuade Germans to carry on supporting Greek fraudsters, and do Germans really have much of a moral obligation to continue supporting Greeks bearing gifts.

As to Roubini’s fifth, sixth, seventh etc ideas, can you really be bothered with them? I can’t. Of course if one trots out ideas at random, sooner or later one will come up with a good idea. By the same token, let a chimpanzee press keys at random on a piano for long enough, and eventually you’ll hear a Mozart sonata (after waiting a billion years). I can think of quicker ways of getting to hear a Mozart sonata when I want to listen to one.



  1. Why the need to be so personal in your rebuttal?
    Base your arguments on the points, leave out the personal attacks; there's no need for them and it make your piece look like there's a personal agenda behind it...

  2. Anon, Good point. Even before seeing your comment I had decided to tone down my language a bit. But speaking as a taxpayer who pays the wages of these so called experts, I do get annoyed when they exude hot air or nonsense.

  3. Dear Mr. Musgrave:

    Taxpayers do not pay for Mr. Roubini's work. He works for himself and teaches at a private university.

    Since you are so wrong on such a fundamental proposition, why pay attention to what else you write?

    Beyond that your views are flawed because they are so shallow. You talk about German taxpayers not being willing to bailout the Greece, but you refuse to look at the whole picture. For example, why should the Greek middle class bailout German banks, via austerity?

    In sum, I do not know what is going to get us out of the present circumstances, but I do know that you ideas reflect most of the thinking that got us into this situation

  4. A correction: Roubini does not "teach" at all. It is no secret that he has been on sabattical from NYU's Stern School since 2007; in fact, I have heard reports from other faculty staff at Stern that he pays Stern (as much as $400,000 every year) to keep his name on their faculty list. A convenient arrangement, since he can still call himself an academic (and so appear "objective", thus helping his consulting business) and the university gets paid as much as 10 students' annual tuitions.


Post a comment.