inequality

Krugman and Bob Solow discuss Tony Atkinson and his new book on inequality.

Game of Thrones

Finn Jones who plays Loras Tyrell tweets with fans:

"nothing would give Loras or the tyrells more pleasure - to eradicate the snide Lannisters from the power..

..they are the "1percenters" of Westeros - they must be abolished."

Blade Runner sequel

Ryan Gosling might star in the Blade Runner sequel

AV Club reviews Game of Thrones

AV Club reviews Game Of Thrones (experts): “Unbowed, Unbent, Unbroken”

AV Club reviews Game Of Thrones (newbies): “Unbowed, Unbent, Unbroken”

Mad Max: Fury Road

Also, his guitar is a flamethrower.

Blur - Coffee and TV

Ken MacLeod seminar at Crooked Timber

Ken MacLeod responds

Rationalism and the True Knowledge by Henry Farrell

Helical Construction in the Work of Ken MacLeod by Joe Walton

Games, simulation, difference and insignificance in The Restoration Game & The Human Front by Sumana Harihareswara

“The free development of each is the condition of the war of all against all”: Some Paths to the True Knowledge by Cosma Shalizi

And This, Too, Is a Romance by Farah Mendlesohn

Ken MacLeod Seminar

protocol and Bitcoin

Why Bitcoin Could Be Much More Than a Currency

Via DeLong

Weimar, Nazis, Social Democrats and Communists

The National Socialists as Conservative Revolutionaries by John Holbo

So you get in a position where there is a kind of two-dimensional struggle: left-right/inside-outside. The Social Democrats were now ‘inside’, the new core of the so-called Weimar coalition that held power through the 20’s. The traditional, Wilhelmine conservative forces were still insiders, by any reasonable calculation. They had tremendous social and institutional leverage everywhere – not to mention most of the money – but they couldn’t compete electorally for a time. Some really strange stuff happened. Some of the most vicious in-fighting was on the left, especially between the social democrats and the communists, starting right in 1918.

From the balcony of the Reichstag building, the SPD leader Philipp Scheidemann proclaimed a German Republic. A couple of hundred meters away, from the balcony of the royal palace, the famed radical socialist and antiwar activist Karl Liebknecht proclaimed a socialist republic. Ebert [a social democrat who didn’t like the suddenness of it all] was furious. He discounted Liebknecht, recently released from the kaiser’s jails, as a wild radical who might just as well have languished longer in prison. But Scheidemann was his close colleague, and no recognized body, no government, not even a political party, had authorized the proclamation of a republic. There had not even been a discussion. (Eric D. Weitz, Weimar Germany: Promise and Tragedy, p. 19)

The Social Democrats where forever fighting with the communists, after that. So, on the one hand, the SD’s were solidifying a grand coalition with more centrist parties, proclaiming women’s rights, a free press, freedom of religion, an expanded welfare state; on the other hand, they were forced to use the proto-Nazi Freikorps to put down the Spartacist League, leading to the murders of Leibknecht and Rosa Luxemburg. Forced because they literally had no police/military alternative. Right-wing paramilitaries were the only available muscle. The SD’s had to work with the powers-that-still-were. Obviously the correct conclusion to draw is not that the SD’s were really right-wingers themselves – or that the Freikorps had left-wing sympathies. Each group tried to use the other. The SD’s wanted to save the Weimar Republic, by any means necessary. The Freikorps wanted to murder communists and gain the sort of legitimacy that might allow them, eventually, to overthrow the Republic – to whose existence they were not reconciled.

-----------

Sort of like Cersei arming the Sparrows and bringing back the Faith Militant who turn on her.

Baker reviews Bernstein

The Reconnection Agenda: The Fun and Easy Route to Broadly Shared Prosperity by Dan Baker

Fed Fail

Yet by the standard of the pre-2007 period we have a depressed level and anemic growth, combined with acceptance of these as the new normal. Thus the North Atlantic is on track to have thrown away 10% of their potential wealth. And there have been insufficient changes in financial-sector regulation or in automatic stabilizers or in other institutions to keep the North Atlantic from once again developing the vulnerabilities it turned out to have in 2007.

DeLong Speech

Guardians of the Galaxy

Peter Quill's Walkman held up remarkably well.

Bob Solow

Bob Solow on rents and decoupling of productivity and wages by Branko Milanovic

Needed: New Economic Frameworks for a Disappointing New Normal by Brad DeLong

Krugman and PGL

The case for cuts was a lie. Why does Britain still believe it? The austerity delusion by Paul Krugman

Lowballing Estimates of Potential Output by ProGrowthLiberal

Keynesianism

Beyond 1950's Economic Theory: Nonlinearity, Multiple Equilibria and Sticky Prices by Roger Farmer

Greece

Greece — the next steps and scenarios by Dan Davies

troll

John H:

"It's the wealthy who benefit most from monetary policy and oppose any rate increase..."

Game of Thrones

Bronn on mean people:

"I've been all over the world and if there's one thing I've learned is that meaness comes around. People like your sister, they always get what's coming to them, eventually, one way or another."

AV Club reviews Game of Thrones (experts): “The House Of Black And White”

IMF on investment since 2008

Explaining the dearth of private investment, by Aqib Aslam, Samya Beidas-Strom, Daniel Leigh, Seok Gil Park, Hui Tong: (Vox EU)

We conclude that a comprehensive policy effort to expand output is needed to sustainably raise private investment. Fiscal and monetary policies can encourage firms to invest, although such policies are unlikely to fully return restore investment fully to precrisis trends. More public infrastructure investment could also spur demand in the short term, raise supply in the medium term, and thus 'crowd in’ private investment where conditions are right. And structural reforms, – such as those to strengthen labor force participation, – could improve the outlook for potential output and thus encourage private investment. Finally, to the extent that financial constraints hold back private investment, there is also a role for policies aimed at relieving crisis-related financial constraints, including through tackling debt overhang and cleaning up bank balance sheets.

Explaining the Dearth of Private Investment @ Economist's View

Keynesian Multipliers, Investment Accelerators, and Crowding-in by DeLong

Crowding In and the Paradox of Thrift by Krugman

The IMF on Investment since 2008 by JW Mason

Wolfgang Münchau

Wow. Wolfgang Münchau on macro:

"The mainstream invested a life’s work in developing their DSGE models. They will not let go easily.... My hunch is that, unlike in mathematics, the successful challenge will come from outside the discipline, and that it will be brutal."

Bernanke on term premiums and wage hikes

German wage hikes: A small step in the right direction by Ben Bernanke

Why are interest rates so low, part 4: Term premiums by Ben Bernanke

the Euler equation and modern macro

The equation at the core of modern macro by Noah Smith

Game of Thrones

new excerpt from The Winds of Winter

global secstags or no?

Secular stagnation and capital flows - can capital flows mitigate or even eliminate the problems generated by secular stagnation? by Jérémie Cohen-Setton on 7th April 2015

Do You Really Want to Know How Ben Bernanke Thinks? Also Larry Summers and Paul Krugman by DeLong (April 5, 2015)

Germany's trade surplus is a problem by Ben Bernanke (April 3, 2015)

The global secular savings stagnation glut by Ryan Avent (Apr 3rd 2015, 16:23)

The New Job Figures and Secular Stagnation by John Cassidy

Larry Summers and Ben Bernanke are having the most important blog fight ever by Matt O'Brien (April 2, 2015)
Ben Bernanke and the "Ask Nicely" Strategy for the Trade Deficit by Dean Baker (April 2, 2015)

Bernanke Says Global Imbalances Bedevil the World Economy. Discuss. by Josh Barro (April, 2, 2015)

Krugman and Summers Versus Bernanke on Secular Stagnation by Dean Baker (Thursday, 02 April 2015 05:29)

Full Employment, Trade Deficits, and the Savings Glut: A Fascinating Debate in the Macro Blogosphere by Jared Bernstein (April 2nd, 2015 at 9:29 am)

Liquidity Traps, Local and Global (Somewhat Wonkish) by Krugman (April 1, 2015 6:12 PM)

Economist's View discussion

Why are interest rates so low, part 3: The Global Savings Glut by Ben Bernanke (April 1, 2015 11:00am)

On Secular Stagnation: A Response to Bernanke by Larry Summers (April 1, 2015 7:30am)
link to Summers's website

Why are interest rates so low, part 2: Secular stagnation by Ben Bernanke ( March 31, 2015 11:00am)

I think Krugman and Summers are saying that even if we eliminate the trade deficit, we'd continue to stagnate and private investment levels would continue to shrink.

What is the level of world savings and investment? Who is saving too much? Look at Bernanke's third entry.

liquidity traps and capital flows

Liquidity Traps, Local and Global (Somewhat Wonkish) by Krugman

Better Call Saul

AV Club reviews Better Call Saul, “Pimento” 

“They call it the caviar of the South.”

Barney Frank, Obama, TARP and homeowner relief

Question for Brad DeLong and the Debt School of the Downturn: What Would Our Saving Rate Be If We Didn't Have Debt? by Dean Baker, Monday, 01 December 2014 05:32

via DeLong

David Dayen: Barney Frank Explains the Financial Crisis: “The TARP legislation included specific instructions to use a section of the funds to prevent foreclosures…

…Without that language, TARP would not have passed…. The Bush administration… used none of the first tranche on mortgage relief, nor did Treasury Secretary Henry Paulson use any leverage over firms receiving the money to persuade them to lower mortgage balances and prevent foreclosures. Frank made his anger clear over this ignoring of Congress’ intentions at a hearing with Paulson that November…. Frank writes, ‘Paulson agreed to include homeowner relief in his upcoming request for a second tranche of TARP funding. But there was one condition: He would only do it if the President-elect asked him to.’…

Obama rejected the request, saying ‘we have only one president at a time.’ Frank writes, ‘my frustrated response was that he had overstated the number of presidents currently on duty’…. Obama’s unwillingness to take responsibility before holding full authority doesn’t match other decisions made at that time. We know from David Axelrod’s book that the Obama transition did urge the Bush administration to provide TARP loans to GM and Chrysler…. It was OK to help auto companies prior to Inauguration Day, just not homeowners. In the end, the Obama transition wrote a letter promising to get to the foreclosure relief later, if Congress would only pass the second tranche of TARP funds. Congress fulfilled its obligation, and the Administration didn’t….

Frank… first leveled [this] in May 2012 in an interview with New York magazine. Nobody in the Obama Administration has ever denied the anecdote…. I suppose those reviewing ’Frank’ can offer an excuse about this being ‘old news’…. The political media’s allergy to policy is a clear culprit here. Jamie Kirchick’s blanket statement in his review of ‘Frank’ that ‘readers’ eyes will glaze over’ at the recounting of the financial crisis is a typical attitude. But… people [who] suffered needlessly for Wall Street’s sins… would perhaps be interested in understanding why…

Bernanke

Former Federal Reserve Board Chair Ben Bernanke gave the keynote speech at a Center on Budget and Policy Priorities forum on policies that promote economic growth and employment.

Greece

Destroying the Greek economy in order to save it by Mark Weisbrot

It could hardly be more obvious that this is not about money or fiscal sustainability, but about politics. This is a government that European authorities didn’t want, and they wish to show who is boss. And they really don’t want this government to succeed, which would encourage Spanish voters to opt for a democratic alternative — Podemos — later this year. 

The IMF projected the economy to grow by 2.9 percent this year, and until the last month or so, there was good reason to believe that — as in 2014, after years of gross overestimates — its forecast would be on target. This growth would likely have kept Syriza’s approval ratings high, together with its measures to provide food and electricity to needy households and other progressive changes. The ECB’s actions, by destabilizing the economy and discouraging investment and consumption, will almost certainly slow Greece’s recovery and could be expected to undermine the government’s support. 

If carried too far, European officials’ actions could inadvertently force Greece out of the euro — a dangerous strategy for all concerned. They should stop undermining the economic recovery that Greece will need if it is to achieve fiscal sustainability.

Bernanke, Krugman, Piketty, and Stiglitz

Why are interest rates so low? by Ben Bernanke

video of "Thomas Piketty, Paul Krugman and Joseph Stiglitz: The Genius of Economics"

Immigrant Song

We come from the land of the ice and snow,
From the midnight sun where the hot springs flow.
The hammer of the gods will drive our ships to new lands,
To fight the horde, sing and cry: Valhalla, I am coming.

"euthanasia of the rentier"

Weekend Reading: John Maynard Keynes on the "Euthanasia of the Rentier" by DeLong

Yellen speech on normalizing policy

Normalizing Monetary Policy: Prospects and Perspectives by Janet Yellen

Krugman and the General Theory, DeLong on Keyens

Today's Economic History: John Maynard Keynes on the Trade Cycle by DeLong

People Claiming That Even John Maynard Keynes Is No True Keynesian!: April Fools Festival Day XVIII by DeLong

Introduction by Paul Krugman to The General Theory of Employment, Interest, and Money, by John Maynard Keynes

Piketty in JEP

Putting Distribution Back at the Centerof Economics: Reflections onCapital in the Twenty-First Century by Piketty

DeLong, Fed, and Confidence Witch

The Assumptions Behind the Federal Reserve’s Choice of 2% per Year Were Erroneous: Focus by DeLong

The Confidence Witch by Francesco Saraceno

Kalecki

Political Aspects of Full Employment

"Kalecki" at EV saying monetary policy doesn't work.

Steve Randy Waldmann

That wasn't full employment monetary policy. That was monetary policy taking advantage of "opportunistic disinlflation" in order to keep labor markets wrong. Meanwhile financial markets were deregulated. Deregulating financial markets is not monetary policy. Waldman is wrong here.

Game of Thrones: Catch the Throne: The Mixtape, Volume 2

via the Soundcloud

Sumner on Krugman and Europe

Krugman on European Growth and the Euro

For simplicity, suppose we started with US and eurozone interest rates being equal. After the monetary injection the eurozone rates are lower.  So the euro is expected to appreciate.  But in the long run it’s expected to be 10% lower.  That means the immediate effect of a monetary stimulus shock must be a more that 10% decline in the euro.  Dornbusch called this exchange rate overshooting.  The model is composed of 4 theories (QTM, PPP, IPT, liquidity effect.)  Most of us are not as adept at juggling 4 theoretical balls in the air at the same time as Krugman, so we struggle with the concept.  As for empirical evidence, these things are hard to test. I’d argue that each component is pretty well established, and that’s good enough (and I suspect Krugman would agree.)  In any case, it’s too beautiful a theory not to use once and a while.  Here’s Krugman:

So, can we say anything about how the recent move in the euro fits into this story? One way, I’d suggest, is to ask how much of the move can be explained by changes in the real interest differential with the United States. US real 10-year rates are about the same as they were in the spring of 2014; German real rates at similar maturities (which I use as the comparable safe asset) have fallen from about 0 to minus 0.9. If people expected the euro/dollar rate to return to long-term normal a decade from now, this would imply a 9 percent decline right now. 

What we actually see is almost three times that move, suggesting that the main driver here is the perception of permanent, or at any rate very long term European weakness. And that’s a situation in which Europe’s weakness will be largely shared with the rest of the world — Europe will have its fall cushioned by trade surpluses, but the rest of us will be dragged down by the counterpart deficits. 

Now, this is not how most analysts approach the problem. They make a forecast for the exchange rate, then run this through some set of trade elasticities to get the effects on trade and hence on GDP. Such estimates currently indicate that the dollar will be a moderate-sized drag on US recovery, but no more. What the economic logic says, however, is that if that’s really true, the dollar will just keep heading higher until the drag gets less moderate.

Krugman’s looking at real rates to abstract from inflation.  While the Dornbusch overshooting model does a nice job of explaining the recent dramatic plunge in the euro, the model also predicts that the real exchange rate is unaffected in the long run. But that’s because interest rates are unaffected in the long run.  Krugman’s readers don’t know this, but unless I’m mistaken he’s arguing that the recent fall in long-term interest rates in Europe is the income effect, not the liquidity effect.  I actually like that argument, but it’s not the way Keynesians usually look at changes in long-term rates occurring in close proximity to QE.  Most Keynesians would say the ECB is driving bond long term bond yields lower.

So Krugman’s arguing that the big fall in the expected 10-year future exchange rate reflects worsening prospects for long term European growth, not just monetary stimulus.  That argument makes sense to me.  But he’s also arguing that this increasing long-term pessimism occurred at almost exactly the same time that expectations of short-term growth became more optimistic.  That might be true, but I kinda doubt it. And yet I can’t think of a better explanation for the fall in the future expected value of the euro.

So I’ll file this under “unresolved problems.”

DeLong rant

Time for a Rant!: Why Oh Why Cannot We Have Better Economists? by DeLong

Marking-One's-Beliefs-to-Market Should Be a Collective Endeavor...: Focus by DeLong

Krugman in 2005

A Whiff of Stagflation
By PAUL KRUGMAN

Published: April 18, 2005

We shouldn't overstate the case: we're not back to the economic misery of the 1970's. But the fact that we're already experiencing mild stagflation means that there will be no good options if something else goes wrong. 

Suppose, for example, that the consumer pullback visible in recent data turns out to be bigger than we now think, and growth stalls. (Not that long ago many economists thought that an oil price in the 50's would cause a recession.) Can the Fed stop raising interest rates and go back to rate cuts without causing the dollar to plunge and inflation to soar? 

Or suppose that there's some kind of oil supply disruption - or that warnings about declining production from Saudi oil fields turn out to be right. Suppose that Asian central banks decide that they already have too many dollars. Suppose that the housing bubble bursts. Any of these events could easily turn our mild case of stagflation into something much more serious.

Krugman and currency wars

http://krugman.blogs.nytimes.com/2013/02/12/its-always-1923/

It’s Always 1923
FEBRUARY 12, 2013 8:18 AM

David Glasner writes sensibly about the “currency war” issue and related subjects, set off by recent commentary by Irwin Stelzer. As Glasner says, expansionary monetary policy can cause currency depreciation — but it is not currency manipulation. There’s a world of difference between Chinese-style intervention-plus-tight-money and either the Fed’s quantitative easing or Japan’s new turn to inflation targeting.

But what really seems to get Glasner going is Stelzer’s bad history — bad history that is, one has to say, very widely accepted out there. No, the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression. Hard money and a gold standard obsession, not excessive money printing, was the proximate disaster.

One thing Glasner doesn’t do, though, is point out not just that Stelzer seems weirdly obsessed with inflation risks despite the complete absence of any evidence, but the unchanging nature of that obsession. A quick bit of googling says that Stelzer has been warning about an inflationary explosion for at least four years (pdf). (In the same piece he also insisted that it would be very hard to find anyone to buy all the bonds the US would be issuing).

This gets at one of the true wonders of this ongoing economic crisis: the inflation-and-soaring-rates crowd has been wrong, again and again, year after year, yet seems completely undaunted in its certainty that it possesses The Truth. You might think that someone, at some point, would have a creeping suspicion that he might be working with the wrong model. But it never seems to happen.

Don Kervack calls the bubble

Mark the date. 

Democrats have saddled themselves with a postmodern financial fluff economy dedicated to the continued erection of nothing on top of nothing. They are afraid the new stock and housing bubbles are going to go pffft before 2016, especially with the pin pricks coming from Europe, and they want to keep puffing it up as long as possible.

King's Landing riot

How inequality hurts a society.

King's Landing riot.

Currency wars

Currencies Gyrate, but There’s No War by Greg Ip

Spain and the IMF

Weisbrot on Podemos and Spain:

The International Monetary Fund (IMF) projects unemployment to still be at 18.5 percent in 2019. This is assuming that things go according to plan, and ignoring that IMF projections have tended to be over-optimistic in the past few years. But the most outrageous part of this forecast is that the IMF is also projecting that the Spanish economy in 2019 will be very close to full employment. In other words, the Fund – and by extension the European authorities— are saying that something like 18 percent unemployment is basically full employment for Spain.

Piketty on European crisis

Thomas Piketty on the Euro Zone: 'We Have Created a Monster'

infrastructure spending

Spending on Our Crumbling Infrastructure by David Wessell

Timothy Hutton

Timothy Hutton, from Ordinary People andTaps to a Cars video

We had such a good time on Leverage, I think we all could’ve done many more seasons. But, you know, five seasons was a really great run, and I think we did… 76 episodes? Something like that. But those five years flew by. We had a great time, we filmed four out of the five years in Portland, Oregon, and for half the year during those five years, we all lived in Portland, had apartments there, and really became a kind of family together.

Game of Thrones Season Five

EU and austerity

The Enduring Logic of Austerity by JW Mason

What Has Happened to Trade Balances in Europe? by JW Mason

Surowiecki on Greece

Greece’s Next Move by James Surowiecki

March 9, 2015

As soon as the battle between Greece and its creditors ended, with the two sides agreeing to a four-month extension of Greece’s financial bailout, the battle over who had won began. Wolfgang Schäuble, the hard-line German finance minister, declared that the new Greek government, led by the leftist party Syriza, had been forced into a “date with reality.” Greece’s Prime Minister, Alexis Tsipras, called the agreement a “decisive step” that would help end austerity and lift the Greek economy from its deep depression, and the Greek public seemed largely pleased with the deal.

At first glance, Tsipras’s positive comments look like spin. Syriza came to power vowing to win a reduction in Greece’s enormous debt burden, to reject the budget commitments that the previous Greek government had made, and to liberate Greece from supervision by the so-called Troika—the European Central Bank, the International Monetary Fund, and the European Commission—that has been vetting all the country’s fiscal decisions in recent years. Yet the new agreement makes no provision for debt reduction. It says that the extension will take place only within “the framework of the existing arrangement.” And Greece’s plans will still be evaluated by the same three institutions. From that angle, the Greeks went 0 for 3.

If you look a little harder, though, you can see that Greece won important breathing room. Heading into the negotiations, the country faced budgetary targets for 2015 and 2016 that would have kept the economy stuck in recession—it has shrunk by thirty per cent since 2008—and prevented the government from doing anything about poverty levels that many observers say constitute a humanitarian crisis. The targets are now up for revision in future talks—a significant concession. According to Mark Weisbrot, the co-director of the Center for Economic Policy Research, “European officials were telling Greece it was their way or the highway. That’s changed. I think Europe blinked.” James Galbraith, an economics professor at the University of Texas at Austin who was in Athens and Brussels to assist the Greek team during the negotiations, told me, “Victory may be too strong a word. But you can certainly call it a successful skirmish. This has given Greece some room to maneuver. Not a lot, but more than it had before.”

In essence, the agreement kicked the can down the road for four months—which suits Greece fine. In recent weeks, money had been pouring out of the country, leaving the banking system on the verge of collapse. And Syriza officials inherited an administrative state that was barely functioning. As Galbraith said, “When they went to the Ministry of Finance for the first time, there was not a document, not a computer. The Wi-Fi was not turned on.” Now Syriza has a little time to deliver on the promises it’s made, both to voters and to Europe.

The real challenge is satisfying those two constituencies, which want very different things. And though there’s space for negotiations, Greece is still in thrall to European institutions: both the E.C.B. and the I.M.F. have already voiced concerns about the reform plans that Greece submitted last Monday. If you owe three hundred billion euros and need Europe to save your banking system, you’re bound to be supervised, but Greece has so far negotiated without its most powerful weapon—the threat of leaving the euro and defaulting on its debts. Such a move, known as the Grexit, was off the table, because Syriza had campaigned on staying in the eurozone, and polls show that this is what most Greeks want. But they may soon need to reconsider.

The conventional wisdom is that returning to the drachma would be a catastrophe for Greece. Certainly, it would be traumatic: there would be an immediate devaluation; the value of savings would tumble; the price of imported goods would soar. But Greek exports would become cheaper and labor costs even more competitive. Tourism would likely boom. And regaining control of its monetary and fiscal policy for the first time since 2001 would give Greece the chance to deal with its economic woes. Other countries that have endured sudden devaluations have often found that long-term gain outweighs short-term pain. When Argentina defaulted and devalued the peso, in 2001, months of economic chaos were followed by years of rapid growth. Iceland had a similar experience after the financial crisis. The Greek situation would entail an entirely new currency rather than just a devaluation. Weisbrot says, “It could work. You have to go through a crisis, but then the economy would recover, and probably more quickly than people expect.” Although Europe is much better equipped to deal with the economic consequences of a Grexit than it was three years ago, the political consequences would be devastating to the European project. That’s why, even if Greece wants to stay in the euro, a credible Grexit threat could help keep Europe from pulling the leash tight again.

For now, Syriza will try to change Europe from within. The fight over Greece’s budget isn’t just a fight about finances; it’s a fight about the ideology of austerity and about whether smaller countries will have a meaningful say in their own economic fate. As Weisbrot told me, “Countries like Greece have lost sovereign and democratic control over the most important macroeconomic policies that any country has. Greece is trying to take some of that control back.” The skirmish may have been successful. The real battles are yet to come. ♦

Suresh Naidu on Piketty

Weekend Reading: IMHO, Suresh Naidu Has the Best Review of Piketty: Capital Eats the World, from Jacobin by DeLong

In their essay last fall on the state of economics, Seth Ackerman and Mike Beggs charged that today’s mainstream is irredeemably captured by conservative ideology. The good news is they’re wrong — Piketty’s work testifies to that.

Contemporary mainstream economics is a politically broad tent, and has a lot to contribute to economic analysis. But it needs to be struggled with, as many have in the debate surrounding Capital in the Twenty-First Century.

Every economics student learns the ‘Kaldor facts’ of economic growth. One of these is that the share of national income going to capital has a long-run tendency to stay constant.

Heterodox economists have been pushing against this stylized fact for a decade, and finally mainstream economists are recognizing and documenting that far from being constant, the capital share has in fact increased around the world. A noted paper by Lukas Karabarbounis and Brent Neiman documented this in the corporate sector around the world, while Francisco Rodriguez and Arjun Jayadev show it for global manufacturing.

Two explanations for this phenomenon typically thrown around by economists are ‘trade and technology’: the global supply of labor has increased relative to capital, and technological changes have lowered the price of capital and increased the substitutability of capital and labor. Another explanation, of course, is political, with right-wing ideology and policy ideas diffusing around the world alongside the Great Right Turn and the demise of the Soviet Union.

Piketty suggests that the rise is a long-term structural trend – the outcome of decelerating population and productivity growth coupled with a profit rate (r) that stays steady. But what keeps r high? Piketty never explicitly says. This question is at the heart of the struggle over how to interpret his book.

The neoclassical approach would be to examine three sets of forces in the market for capital that could account for it: supply, demand, and taxes. The supply of capital is given by the savings rate, and one important idea in Piketty is that the taste for savings at the top looks little like the frugal ant saving in order to consume for the future, the conceit of optimal growth theory. Instead, he suggests that a better way to think about savings is through models where accumulation and the building of estates are ends in themselves.

Piketty and others have been exploring these kinds of models in academic papers, where multiplicative shocks to capital accumulation — random fluctuations in tastes, lifespans, fertility and investment opportunities — generate a skewed distribution of wealth. ‘Accumulate! Accumulate! That is Moses and the prophets,’ ran a memorable line from Marx.

If it is an accurate description of the capitalist drive to invest and save, then the forces that drive the wealthy to accumulate might not just be the realization of future consumption, but instead an insatiable drive for security, sociological pressures, psychological fantasies of future empires, or other structural imperatives.

When you start thinking of savings this way, the case for taxing capital becomes much clearer. If the supply of capital is more like immobile real estate and less like footloose cash, basic economics suggests that we can tax it, because it won’t disappear, and you might even be doing some social good.

If people are saving to pass inheritances onto their kids, then the cost of taxing capital is depriving some of trust funds, not a comfortable retirement. Not only does it mean that certain standard theories saying optimal capital taxation is zero don’t hold up anymore. It also means that one-off re-distributions of assets won’t stay equal for long, so some kind of permanent capital tax is needed.

Piketty suggests a fruitful research agenda here. Once freed from the consumption Euler equation, the ‘frugal ant’ view of saving, what theory of private sector savings do we need to best understand inequality and growth? The question about how to tax capital becomes less about the trade-off between savings and consumption, and more about how to implement global taxes to keep capitalists from taking their money offshore.

The other blade of the scissors determining r is the demand for capital. Piketty makes the argument that r is likely to stay higher than g because capital and labor are becoming more substitutable, which could be read as the incoming future of robot capitalism as well as increased trade with labor-intensive countries.

The upshot is that even though capital will keep accumulating, the rate of profit will not fall much because we can keep substituting out workers with it. Peter Frase’s ‘Four Futures‘ captured this well; in one of the futures, an abundant, narrowly owned capital stock resulted in relatively low wages for everyone despite high output.

But we have heard this before. Consider the development of the tractor, which mechanized virtually all of agriculture over the 20th century. Somehow new desires and demands sprung up for new kinds of manufactured goods, many of pure entertainment value, and people stayed employed and real wages kept rising.

I do not think there is anything inevitable about how capital-labor substitution could evolve in the future. It is quite possible that future technological and organizational changes are labor-augmenting rather than labor-saving. I’ll return to this below.

Finally, Piketty can combine these supply and demand elements into a complete model of income distribution dynamics. Imagine an economy where capital is accumulated, but there are sudden shocks to savings/bequests as well as wages, and a high elasticity of substitution between capital and labor.

In this model, capital increases as a share of income, the rate of profit doesn’t fall very much (because capital and labor are very easily substituted for each other), and the distribution of capital is very unequal (because persistently high r allows capital shocks to be amplified over time). It can be embellished with increasing rates of return in wealth, reflecting the fact that richer people can obtain better financial services and diversification in order to earn higher rates of return. This model gets most of the way in explaining the stylized facts about capital in Piketty’s book.

The Limits to Capital

What I’ve described above is the conventional liberal economist’s interpretation of Piketty’s work, the one that Piketty and his critics have coordinated on in public. The question of whether capital will eat the world boils down to the degree of substitutability between labor and a single aggregate capital.

Despite assuming competitive labor and capital markets, this setup explains rising inequality and increasing capital shares, and yields a justification for capital taxation, completely within a neoclassical model. If this was all that was there, it would still be a pretty big advance within economics.

In this conventional interpretation, Piketty stays inside orthodox growth theory. His results arise from modifications to the savings equation and the marginal-pricing production function, not from alternatives to them. If the problem is just very high substitutability, a variety of labor market reforms are taken off the table, as firms would just replace workers with machines when you raise the wage. Minimum wages would kill a lot of jobs, and unions would immediately induce firms to close.

But this is again contradicted by recent evidence on both fronts. More importantly, it misunderstands capital by putting politics outside the production function, rather than inside it.

The increasing elasticity of substitution between ‘capital’ and ‘labor’ may be as much determined by institutions and property rights as by technology. Think of the parallel with slavery. The robot economy and the slave economy may both have higher elasticities of substitution than industrial capitalism. Slaves could do virtually all the tasks of free labor, and were movable assets.

In ‘The Causes of Slavery and Serfdom,’ Evsey Domar famously argued that it was a historical impossibility to have free labor, abundant land, and an aristocracy simultaneously. Free labor and abundant land would make aristocratic claims on labor impossible, abundant land and an aristocracy would require coerced labor, and only scarce land could depress wages enough to allow an aristocracy to coexist with free labor.

Perhaps a similar trilemma exists with abundant robots, dignified employment, and unequal capital ownership.

This sort of institutions-as-primitives thinking is how we should approach the question of capital. Capital is a set of property rights entitling bearers to politically protected rights of control, exclusion, transfer, and derived cash flow. The capital share of income is just the last part of that sequence.

Like all property rights, its delineation and defense require actions of state power, legal standardization, and juridical legitimacy. In the last instance, capital includes the ability to call on the government to evict trespassers, be they burglars, sit-down strikers, or delinquent tenants.

In economics, we capture some of the political dimension of capital with incomplete contracts. Contracts between financiers, entrepreneurs, and workers (among others) can never be completely specified. Instead, large domains of the economic transaction are left to the discretion of one side of the market.

A CEO like Steve Jobs complains about the power exercised by Apple’s shareholders in the late 1980s as surely as Jobs’s workers complain about the tyrannical power wielded by Jobs himself. As Ronald Coase argued, this distribution of power is not outside the market, but part of the transaction. Workers do what they are told because they can be kicked out of the firm. Capital here is seen as not just a flow of income, but rather a right to exclude and appropriate. Focusing on balance sheets rather than bosses will miss this.

Seeing capital this way also blurs the line between supermanagers and rentiers. Supermanagers happen to have labor market contracts (in the form of bonuses and stocks and options) that entitle them to stupendous income when the firm is doing well. It is not clear that this is ‘labor’ income as much as it is a form of capital that requires you to run meetings and wear a power suit.

Jointly, the rentiers and the supermanagers have cash flow and control rights inside the firm, and the institutions of corporate finance and governance that allocate these powers determine the demand for capital as surely as technology does.

The book is too good to miss this, however. It contains an excellent section on the gap between cash-flow rights and control rights in corporate governance, which suggests a capital demand schedule derived not just from firm optimization decisions, but from the distribution of power within the firm.

The book points out that German shares are ‘underpriced’ because shareholders there do not have the same level of political power as shareholders in the US and UK, since they have to share power with workers’ councils and other stakeholders. The same thing is true of unions in the US. David Lee and Alexandre Mas shows that strong union victories in NLRB elections once reduced stock prices, yet it is very unlikely they changed the replacement value of the company’s underlying assets.

The everyday encounter most people have with accumulated wealth is not through prices in the market for shoes, or the society pages, but instead the control and threats inflicted by their employers, landlords, and bankers. Inequality of income and wealth means that some people live off unjustly earned income, but it also means a lot more people are on the short-end of an asymmetric exchange, toiling away as personal assistants and Mechanical Turks.

This is where Piketty’s Walrasian conventions dampen his contribution: he discusses the first, but not the second. It’s like saying slavery is an inequality of assets between slaves and slaveholders without describing the plantation.

Even Adam Smith suggested measuring a person’s income by the ‘quantity of that labor which he can command.’ This has normally been taken to mean income of the rich relative to the wage. But it also means looking at ‘command’: what privileges and obligations can one demand from the soul purchased (or rented)?

An economy that allows indentured labor means that wealth can purchase more power over people; an economy with robust union contracts means that capital is trammeled in its control over the shop floor. From sexual harassment on the job to the indignities of gentrification and nonprofit funding, a world of massive inequality is a world where rich people get to shape environments that everybody else has to accept.

Piketty repeatedly announces that politics plays a large role in the distribution of income. But he neglects that the distribution of income and wealth also generates inequalities of larger privileges and prerogatives; wealth inequality together with a thoroughly commodified society enables a million mini-dictatorships, wherein the political power of the rich is exercised through the market itself.

In a thoroughly marketized world, the wealthy can purchase educational reform, the charity of their choice, think-tanks, legislative language, and faceless TaskRabbiters willing to work for a pittance. While feudal lords were wealthy, the absence of certain types of markets made their social power somewhat independent of wealth; the regalia and mounted vassals were an independent basis of status and were not simply purchasable.

But there is an important and nasty complementarity between massive inequality in income and wealth and a commodified, ‘fully-incentivized’ world. When every action can have pecuniary rewards attached to it, and every source of well-being can be priced at exactly a person’s willingness to pay, the social power commanded by the rich is magnified in a way that is difficult to see when comparing a dollar in 1920 with a dollar today.

Piketty’s big policy idea is taxing wealth directly, progressively, and globally. This is certainly important to put on the table, up there with other global problems like climate change, intellectual property, open borders, and, dare I say, reparations.

But the focus on taxes is again a straightjacket imposed by the equality-versus-efficiency lens through which too many public finance economists see policy issues. The preferred policy instruments are always taxes and transfers, when it is not at all clear that these alone are the best tools for reducing inequality (although they are surely useful for increasing it). This is the same technocratic spirit that makes American liberals love the Earned Income Tax Credit as the only redistributive arrow in the state’s quiver.

The structure and limitations of Piketty’s argument also explains the love the liberal American policy wonk has for it. It comes with a Zip file full of spreadsheets, a clear argument reasoned from data and common sense, the charisma of the economics profession, and a policy prescription that is technically feasible and politically hopeless.

Like the policy expert, it has neither utopian demand-it-all energy nor the concrete backing of a political actor aiming to win. The book reminds the American wonk community that if only their people could run the show, they have the expertise (and the data!) to produce finely-calibrated optimal policies without politics.

But the collapse in the capital and top income shares after World War II (and other wars) came along with radical transformations of all kinds of economic institutions, with millions of dead, sui generis geopolitics, and a host of newly mobilized popular forces. The obligations enshrined in balance sheets were destroyed by financial collapse and war, and kept in check by social democracy and postwar growth. Little in the way of clever policy advice mattered for any of this.

Where Do We Go from Here?

Piketty’s book reflects the promise and current limits of economics as a discipline. The ideas, which are powerful, could not have originated anywhere but mainstream economics. They require a command of the mathematical models of growth and taxation, and only economists would appreciate the painstaking reconstruction of the balance sheet data.

But Piketty oscillates between paying homage to fundamental forces of technology, tastes, and supply and demand, and then backtracking to say that politics and institutions are important.

So how to do better?

A first step could be a multisector model with both a productive sector and an extractive, rent-seeking outlet for investment, so that the rate of return on capital has the potential to be unanchored from the growth of the economy. This model could potentially do a better job of explaining r > g in a world where capital has highly profitable opportunities in rent-seeking rather than production, and it would generally disassociate the growth of the productive economy from the growth of abstract wealth. When people say neoliberalism was good for growth, they tend to be looking at the stock market, not GDP or wages.

More fundamentally, a model that started with the financial and firm-level institutions underneath the supply and demand curves for capital, rather than blackboxing them in production and utility functions, could illuminate complementarities among the host of other political demands that would claw back the share taken by capital and lower the amount paid out as profits before the fiscal system gets its take.

This is putting meat on what Brad Delong calls the ‘wedge’ between the actual and warranted rate of profit. Commentators have listed their pet policy proposals under this umbrella, from strengthening labor and tenants movements to weakening intellectual property rights and financial regulation. And yes, maybe even selective inflation of nominal claims, as with the repudiation of the gold indexation clause in 1933.

We need even more and even better economics to figure out which of these may get undone via market responses and which won’t, and to think about them jointly with the politics that make each feasible or not. While Piketty’s book diagnoses the problem of capital’s voracious appetite, it would require a different kind of model to take our focus off the nominal quantities registered by state fiscal systems, and instead onto the broader distribution of political power in the world economy.

Interest on Excess Reserves

Stanley Fischer on IOER

Because not all institutions have access to the IOER rate, we will also use an overnight reverse repurchase agreement (ON RRP) facility, as needed. In an ON RRP operation, eligible counterparties may invest funds with the Fed overnight at a given rate. The ON RRP counterparties include 106 money market funds, 22 broker-dealers, 24 depository institutions, and 12 government-sponsored enterprises, including several Federal Home Loan Banks, Fannie Mae, Freddie Mac, and Farmer Mac. This facility should encourage these institutions to be unwilling to lend to private counterparties in money markets at a rate below that offered on overnight reverse repos by the Fed. Indeed, testing to date suggests that ON RRP operations have generally been successful in establishing a soft floor for money market interest rates.

Larry Summers

Larry Summers says the right things.

Yellen, ECB monetary policy, JW Mason and the credit context

video of Yellen's testimoney to the Senate Banking Committee

The Eurozone Counterfactual by David Beckworth

Disgorge the Cash by JW Mason

Silicon Valley season 2

Yellen

House Republicans Press Janet Yellen on Stimulus Campaign By BINYAMIN APPELBAUM

WASHINGTON — House Republicans on Wednesday peppered Janet L. Yellen, the Federal Reserve chairwoman, with pointed questions about the central bank’s stimulus campaign and its responsibilities as a financial regulator.

Republicans, who control Congress but not the agencies that interpret and execute legislation, appear frustrated with the course of economic policy. They want the Fed to retreat more quickly from its stimulus campaign and to ease some of the restrictions that a Democrat-controlled Congress imposed on the financial industry after its 2008 collapse.

Ms. Yellen, for her part, pushed back more strongly than at past hearings, sometimes speaking over her questioners to make a point. She defended the Fed’s actions and warned against proposals to constrain its independence.

The hearing opened with a sharp exchange between Ms. Yellen and Jeb Hensarling, the Texas Republican who is chairman of the Financial Services Committee.

Mr. Hensarling backs legislation requiring the Fed to adopt a mechanical rule for setting its benchmark short-term interest rate. Such a rule would have limited the stimulus campaign the Fed has undertaken since the Great Recession.

He quoted a snippet of Ms. Yellen’s remarks at a 1995 Fed meeting at which she praised rules that mechanically dictate how the central bank should balance the sometimes-divergent priorities of moderate inflation and minimal unemployment. That, he quoted her as saying, “is what sensible central banks do.”

He then asked Ms. Yellen, “Do you no longer believe that a rules-based policy like the Taylor Rule is what sensible central banks do?” The rule is a formula written by the Stanford economist John Taylor that specifies interest rates based on inflation and the gap between actual and potential economic output.

But the context of that 1995 quote is important. Ms. Yellen was then pushing the Fed to pay more attention to job growth, and she was expressing a preference for rules that considered unemployment and inflation, as opposed to rules focused solely on the pace of inflation.

That, she said at the time, “is an example of the type of hybrid rule that would be preferable in my view, if we wanted a rule.”

She continued, “I think the Greenspan Fed has done very well by following such a rule, and I think that is what sensible central banks do.”

The Yellen Fed regards job growth as its priority, a transformation so complete that hewing to a Taylor-style rule actually would curb the Fed’s stimulus campaign. Ms. Yellen has said in other forums that she sees rules as useful reference tools, but that policy should be shaped by circumstances.

On Wednesday, pressed by Mr. Hensarling, she responded sharply.

“I don’t believe that the Fed should chain itself to any mechanical rule,” she said. “I did not believe that in 1995. I do not believe it now.”

Democrats argue that Mr. Hensarling’s proposal is an attempt by Congress to meddle in monetary policy.

“I think it’s important to have transparency but not at the expense of the independence of the Fed,” said Representative Al Green, a Texas Democrat.

Representative Scott Garrett, a New Jersey Republican, said in turn that Congress had intended to shield the Fed from political pressure “to juice the economy,” while in the current situation, Republicans were seeking to curb its stimulus campaign.

Like Ms. Yellen, he suggested that circumstances had changed and that the rules should adapt.

Greece

Reading The Greek Deal Correctly by James K. Galbraith

On Friday as news of the Brussels deal came through, Germany claimed victory and it is no surprise that most of the working press bought the claim. They have high authorities to quote and to rely on. Thus from London The Independent reported:

several analysts agreed that the results of the talks amounted to a humiliating defeat for Greece.

No details followed, the analysts were unnamed, and their affiliations went unstated – although further down two were quoted and both work for banks. Many similar examples could be given, from both sides of the Atlantic.

The New Yorker is another matter. It is an independent magazine, with a high reputation, written for a detached audience. And John Cassidy is an analytical reporter. Readers are inclined to take him seriously and when he gets something wrong, it matters. Cassidy’s analysis appeared under the headline, “How Greece Got Outmaneuvered” and his lead paragraph contains this sentence:

Greece’s new left-wing Syriza government had been telling everyone for weeks that it wouldn’t agree to extend the bailout, and that it wanted a new loan agreement that freed its hands, which marks the deal as a capitulation by Syriza and a victory for Germany and the rest of the E.U. establishment.

In fact, there was never any chance for a loan agreement that would have wholly freed Greece’s hands. Loan agreements come with conditions. The only choices were an agreement with conditions, or no agreement and no conditions. The choice had to be made by February 28, beyond which date ECB support for the Greek banks would end. No agreement would have meant capital controls, or else bank failures, debt default, and early exit from the Euro. SYRIZA was not elected to take Greece out of Europe. Hence, in order to meet electoral commitments, the relationship between Athens and Europe had to be “extended” in some way acceptable to both.

But extend what, exactly? There were two phrases at play, and neither was the vague “extend the bailout.” The phrase “extend the current programme” appeared in troika documents, implying acceptance of the existing terms and conditions. To the Greeks this was unacceptable, but the technically-more-correct “extend the loan agreement” was less problematic. The final document extends the “Master Financial Assistance Facility Agreement” which was better still. The MFFA is “underpinned by a set of commitments” but these are – technically – distinct. In short, the MFFA is extended but the commitments are to be reviewed.

Also there was the lovely word “arrangement” – which the Greek team spotted in a draft communiqué offered by Eurogroup President Jeroen Dijsselbloem on Monday afternoon and proceeded to deploy with abandon. The Friday document is a masterpiece in this respect:

The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions. This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece. The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review.

If you think you can find an unwavering commitment to the exact terms and conditions of the “current programme” in that language, good luck to you. It isn’t there. So, no, the troika can’t come to Athens and complain about the rehiring of cleaning ladies.

To understand the issues actually at stake between Greece and Europe, you have to dig a little into the infamous “Memorandum of Understanding” signed by the previous Greek governments. A first point: not everything in that paper is unreasonable. Much merely reflects EU laws and regulations. Provisions relating to tax administration, tax evasion, corruption, and modernization of public administration are, broadly, good policy and supported by SYRIZA. So it was not difficult for the new Greek government to state adherence to “seventy percent” of the memorandum.

The remaining “thirty percent” fell mainly into three areas: fiscal targets, fire-sale privatizations and labor-law changes. The fiscal target of a 4.5 percent “primary surplus” was a dog as everyone would admit in private. The new government does not oppose privatizations per se; it opposes those that set up price-gouging private monopolies and it opposes fire sales that fail to bring in much money. Labor law reform is a more basic disagreement – but the position of the Greek government is in line with ILO standards, and that of the “programme” was not. These matters will now be discussed. The fiscal target is now history, and the Greeks agreed to refrain from “unilateral” measures only for the four-month period during which they will be seeking agreement.

Cassidy acknowledges some of this, but then minimizes it, with the comment that the deal “seems to rule out any large-scale embrace of Keynesian stimulus policies.” In what document does any such promise exist? There is no money in Greece; the government is bankrupt. Large-scale Keynesian policies were never on the table as they would necessarily imply exit – an expansionary policy in a new currency, with all the usual dangers. Inside the Euro, investment funds have to come from better tax collection, or from the outside, including private investors and the European Investment Bank. Cassidy’s comment seems to have been pulled from the air.

Another distant fantasy is the notion that the SYRIZA team was “giddy” with political success, which had come “practically out of nowhere.” Actually SYRIZA knew for months that if it could force an election last December, it would win. And I was there on Sunday night, February 8, when Prime Minister Alexis Tsipras opened Parliament with his version of the State of the Union. Tsipras doesn’t do giddy. And Yanis Varoufakis’s first words to me on arrival at the finance ministry just before we went over to hear him were these: “Welcome to the poisoned chalice.”

Turning to the diplomatic exchanges, Cassidy concludes that Tsipras and Varoufakis “overplayed their hand.” An observer on the scene would have noticed that the Greek government remained united; initial efforts to marginalize Varoufakis were made and rebuffed. Then as talks proceeded, European Commission leaders Jean-Claude Juncker and Pierre Moscovici went off-reservation to be helpful, offering a constructive draft on Monday. Other governments softened their line. At the end-game, remarkably, it was the German government that split – in public – with Vice Chancellor Sigmar Gabriel calling the Greek letter a basis for negotiation after Finance Minister Wolfgang Schäuble said it wasn’t. And that set up Chancellor Angela Merkel to make a mood-changing call to Alexis Tsipras. Possibly the maneuver was choreographed. But still, it was Schäuble who took a step back in the end. It seems that none of these facts caught Cassidy’s attention.

Finally, in the run-up to these talks did the Greek side fail to realize that they had no leverage, giving – as Cassidy writes – all the advantages to Schäuble once “he realized that Varoufakis couldn’t play the Grexit card”?   In truth the Greeks never had any intention of playing any cards, nor of bluffing, as Varoufakis wrote in The New York Times and as I had written two days after the election, in Social Europe:

What leverage does Greece have? Obviously, not much; the heavy weapons are on the other side. But there is something. Prime Minister Tsipras and his team can present the case of reason without threats of any kind. Then the right and moral gesture on the other side would be to … grant fiscal space and to guarantee Greek financial stability while talks are underway. If that happens, then proper negotiations can proceed.

That appears to be what happened. And it happened for the reason given in my essay: in the end, Chancellor Merkel preferred not to be the leader responsible for the fragmentation of Europe.

Alexis Tsipras stated it correctly. Greece won a battle – perhaps a skirmish – and the war continues. But the political sea-change that SYRIZA’s victory has sparked goes on. From a psychological standpoint, Greece has already changed; there is a spirit and dignity in Athens that was not there six months ago. Soon enough, new fronts will open in Spain, then perhaps Ireland, and later Portugal, all of which have elections coming. It is not likely that the government in Greece will collapse, or yield, in the talks ahead, and over time the scope of maneuver gained in this first skirmish will become more clear. In a year the political landscape of Europe may be quite different from what it appears to be today.

Varoufakis and Krugman

Afternoon Must-Read: Yanis Varoufakis: Confessions of an Erratic Marxist in the Midst of a Repugnant European Crisis by Brad DeLong

Greece Did OK by Krugman

Now that the dust has settled a bit, we can look calmly at the deal — if it really is a deal that survives through tomorrow, which some people doubt. And it’s increasingly clear that Greece came out in significantly better shape, at least for now. 

The main action, always, involves the Greek primary surplus — how much more will they need to raise in revenue than they can spend on things other than interest? The question these past few days would be whether the Greeks would be forced into agreeing to aim for very high primary surpluses under the threat of being pushed into immediate crisis. And they weren’t. 

One way to see this is through careful parsing of the language, as done here. That’s quite useful. But I’d argue that in an important sense we’re past that kind of word-chopping. Instead, we need to think about what happens substantively from here out. 

Right now, Greece has avoided a credit cutoff, and worse yet an ECB move to pull the plug on its banks, and it has done so while getting the 2015 primary surplus target effectively waived. 

The next step will come four months from now, when Greece makes its serious pitch for lower surpluses in future years. We don’t know how that will go. But nothing that just happened weakens the Greek position in that future round. Suppose that the Germans claim that some ambiguously worded clause should be interpreted to mean that Greece must achieve a 4.5 percent of GDP surplus, after all. Greece will say no, it doesn’t — and then what? A couple of years ago, when all the VSPs of Europe believed utterly in austerity, Greece might have faced retaliation thanks to wording issues; not now. 

So Greece has won relaxed conditions for this year, and breathing room in the run-up to the bigger fight ahead. Could be worse.