Monday, October 15, 2012
Bad Advice for the Greeks
October 15, 2012
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-à-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!