February 23, 2015

Monday Morning Muesli

One of the first statements by Greece's new prime minister Alexis Tsipras called on Germany to pay more reparations to Greece for losses arising from the Nazi occupation in World War II. Some commentators added that, if Germany could have its debts and damages mostly forgiven after World War II, Greece could be forgiven its debts today. Back in June 2012 my LSE colleague Albrecht Ritschl had an interesting column on The Economist websiteabout the magnitudes. Anyway, the implication is that if Germany got away with it; why not Greece?

Maybe a few aspects of how the war ended have been forgotten. At the end of the war, Germany was placed under military occupation. Its territory was divided, and permanently stripped of East Prussia and Alsace-Lorraine in the West. The German leaders responsible for the damages caused in the war were killed or hanged, and punishment was meted out to many other Germans with lesser responsibility. Eastern Germany paid large reparations to the Soviet Union. In both East and West Germany the constitution and economic and social order were comprehensively refashioned by external powers. In both East and West Germany young people were systematically educated to feell shame about their country's recent past.

If you ignore all that, then yes, Germany got away with it. If Greek leaders want to argue for debt forgiveness on that precedent, then let them go for it. I'm not against an element of debt forgiveness for Greece, by the way. I'm just against misusing history and invoking the Nazis to get opinion on your side.

***

Is austerity self-defeating? Lots of people seem to think so, and many of these seem to hold that view with great certainty. Relevant to this is a column by Benjamin Born, Gernot Müller, and Johannes Pfeifer that appeared on VoxEU over the weekend. They study the effects of temporary budget austerity using data from 38 emerging and advanced economies from 1990 to 2014. They distinguish between a budget cut in normal times and in times of financial stress (when the default premium on public debt is initially high). For countries that are initially stressed they find that in the short term austerity is indeed self-defeating: in the first year, GDP falls and the default premium rises. But the adverse scenario does not persist. Within five or so years GDP recovers and fiscal adjustment opens the way to lower interest rates than before.

Of course, this is just one study among many that are under way or recently published. A measure of wait-and-see is usually recommended. But it does contribute one more piece to the case for spending less if it was a problem to spend more. It also suggests we should give some provisional credit to the politicians that adopt it. Maybe they're just taking a longer view, something we don't usually associate with politics.

***

As driverless cars come nearer, there's bound to be public debate on the safety issues. On BBC CWR the other day I heard an interviewee: "But how safe will they be? If something goes wrong, who can we hold to account? We can't have them on the road until they're perfect!" I thought to myself: "Nooooo!" We shouldn't have driverless cars on the roads until they are clearly better at getting passengers safely to their destinations than the typical human driver. Bearing in mind that at 3AM the typical driver is likely to be either a night clubber on the way home or a taxi driver, that standard could be variable and, at times, not very demanding.

I do see the problem though. When the average driverless car is safer than the average driver, so that the total number of traffic fatalities is reduced, the driverless cars will still kill some people, for which they will be blamed. Moreover, driverless cars will be made by a few easily identifiable large corporations, who will make clear targets for the anger of mourning friends and relatives. If a few thousand people are rightly angry with drunk drivers, that's a hopeless cause. If the same number are angry at Toyota, say, it's a campaign. The likely result: driverless cars will be slower to catch on, and the safety gains will be harder to realize. I don't see a solution.

***

You may have already guessed that the title of this column is a tribute to Zack Weiner's fantastic Saturday Morning Breakfast Cereal. I'll try to put some Monday Morning Muesli on the table once a week ... or once a month ... or whenever.


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I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



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