The Miracle of the Fish and Loaves: Greece Meets May 12 IMF Payment!

The Miracle of May 12: Greece manages to make €757 million IMF payment (fish: right) while continuing to pay domestic salaries and pensions (loaves: left). Informed observers attribute it to the Salvation of Salonika. But for how much longer can the multitudes be fed?

 

The Greek game of turkey continues to astonish us. The Greek government authorized the transfer this morning of the €757 million it owes to the IMF, thus avoiding default, producing a Miracle of May 12 and continuing to defy worldwide expectations (including our own).

How, and especially, why, is it doing it? First, there is the Salvation of Salonika, where the mayor of Greece’s second largest city, Thessaloniki, alone among major Greece municipalities, transferred the city’s cash reserves to the Greek Central Bank:

Thessaloniki Mayor Yiannis Boutaris believes that the government’s behavior is “completely crazy” but he has nevertheless led the way among peers in transferring his municipality’s cash reserves to the Bank of Greece, where the government can use them for short-term borrowing.

“It is very important that we show this municipality understands what will happen to the country,” Boutaris told the municipal council on Tuesday ahead of a vote on the matter. “We are not doing the government a favor; we are supporting the country.”

However, Boutaris admitted that he does not see eye to eye with the coalition on the way it has handled negotiations with the institutions. “The government does not speak the same language as those it is negotiating with,” he told Kathimerini. “That is why they cannot understand each other.”

[ekathimerini.com , Tuesday May 5, 2015 (21:07)]

Second, in its obsession with providing “the institutions” (aka troika) with no pretext for throwing it out of the Eurozone as part of its larger game-of-turkey strategy, it apparently has been indulging in its own variety of turbo-austerity—temporarily boosting its fiscal surplus by delaying payments to suppliers and investment projects (see Peter Spiegel at FT.com and the Greek budget analysis by Silvia Merler at breugel).

Greek Finance Minister and media superstar Yanis Varoufakis, rebounding from his recent sidelining, reiterates that Greece, despite its financial difficulties, will not cross “red lines” regarding pension cuts and reforms to collective bargaining. Nevertheless, he freely admits that Greece is facing a liquidity crisis within “a couple of weeks.”

German Finance Minister Wolfgang Schäuble, for his part, has made a surprising counter in his game-of-turkey hand by now allowing for a Greek referendum to decide whether the country will remain in the Eurozone and accept further austerity and painful “structural reforms.” Recall that an attempt by then Prime Minister Papandreou in 2011 to hold a similar referendum was immediately torpedoed by explicit threats of French President Sarkozy and German Chancellor Merkel to summarily expel Greece from the Eurozone, and soon brought down his government. Peter Schwarz on the World Socialist Website characterized this incident as follows:

The way Papandreou was forced to retreat—and possibly to resign—has all the hallmarks of a political coup. It demonstrates that the austerity measures implemented by the European Union to save the euro and the banks are incompatible with democratic principles.

That Schäuble now displays such a conciliatory attitude to a Greek referendum may be indicative of just how far the Germans have come in their game of turkey. That is, they now want Greece out, but, like all other participants in this game, don’t want to have any egg left on their face afterwards. This is something for the Greek people themselves, since their government has been skillfully playing its hand in this game of turkey as a war of attrition by making Herculean efforts to avoid default while not betraying its electoral mandate.

But on a more personal level, Schäuble took pains to defend his much maligned Greek counterpart in a recent interview in the Frankfurter Allgemeine (my translation):

We are both finance ministers and bear responsibility, and thus we work well together. The media first built Varoufakis up into a superstar and now they have been dressing him down. Each is as misplaced as the other.

Update 17:35 CET: Unfortunately, Max Weber’s Entzauberung der Welt (disenchantment of the world) once again seems to be triumphant in our enlightened age, relegating the Salvation of Salonika to the rubbish heap of religious myths. The Financial Times reports at 14:41 CET that Greece actually plundered its emergency account at the IMF (apparently with the latter’s connivance) to the tune of €650 million to meet today’s Miracle of May 12 repayment. According to the FT, “Without the additional cash the government would not have been able to repay the loan instalment and also disburse nearly €1bn on Wednesday to pay public sector salaries, another official said.”

Is there no solace left for the spiritually inclined in our disenchanted meltdown creation?

Of course this can only mean that the prophesized “Grexit, Graccident, Grone” moment looms even nearer when Greek salaries and pensions—the miracle of the loaves—also comes under threat of disenchantment before the end of the month. Or can there still be a Eurogroup epiphany?

The Welfare State Perpetuum Mobile: Is Greece Reinventing the Clientelist Wheel (aka the Circular Flow)?

   

Left: Perpetuum Mobile of Villard de Honnecourt (about 1230). Right: Boyle’s self-flowing flask (18th century). Source: Wikimedia Commons.

Yesterday’s Financial Times brings us more astonishing updates on Greece’s game of musical turkey: “Greece overturns civil service reforms.” One of the notorious “structural reforms” that all previous governments had agreed upon with the hated “troika” was to slim down Greece’s notoriously overstaffed and highly inefficient state bureaucracy (a bureaucracy which, like Italy’s, may actually reduce economic growth by creating unnecessary layers of red tape to justify its own parasitic existence). Now the Syriza coalition wants to reinstate thousands of dismissed civil servants and public broadcasting employees (including the famous finance ministry cleaning staff):

The latest Greek law calls for the rehiring of about 13,000 civil servants whose jobs were cut in an overhaul of public administration agreed by with bailout lenders by the previous Greek government. It also eliminated annual evaluations for civil servants and promotions based on merit. …

Kyriakos Mitsotakis, who — as the previous government’s minister for administrative reform — implemented past cuts, said Syriza’s legislation marked a return to the clientelist practices of the past.

As someone sympathetic to Greece’s current plight and fully aware that mass dismissals and wage cuts during a recession may be self-defeating from both the perspectives of overall economic activity and state finances, this news still gives one as an economist pause for thought. For it reveals an underlying philosophical attitude widespread among many leftists that, via government employment and generous pensions, the welfare state simply creates the income that it can subsequently tax to finance these payments in the first place. After all, the economy is just a circular flow (your expenditures are my income), and thus a generous welfare state should be in a position to bootstrap its way to an economic pepetuum mobile. No actual production or exports necessary! I became painfully aware of this after attending a discussion with Katerina Notopoulou, a member of the Syriza central committee, at the Kreisky Forum recently in Vienna. There I heard the astonishing statement that the Greek government needs to pay higher pensions so that pensioners can pay taxes (to in turn finance their pensions). While Ms. Notopoulou is a psychologist actively and commendably involved in cooperative initiatives to help citizens denied health insurance, and not an economist, this really does smack of a utopian leftwing welfare state perpetuum mobile.

Now don’t get me wrong here. I am no Tea Party fanatic who thinks that all government activity is parasitic on the “real” economy and must be eliminated. It is clear that well-designed government regulation, “night watchman” functions (police, legal system) and the provision of public goods (education, R&D, health care…) are absolutely essential for the efficient running of a modern economy. Still, this perpetuum mobile perspective is very much at odds with what one can call the “biophysical” perspective on economics: that economic activity is really a one-way flow from nature, via the productive process employing human and machine labor, to economically valuable output and wastes. And that the monetary circular flow we observe is ultimately powered by this one-way flow just like a rotating water wheel is powered by the flow of its underlying stream. But self-powered closed-circuit water wheels, aka perpetual motion machines, I thought, are impossible, even in leftwing economics.

 

A rock-crushing mill illustrated by Georgius Agricola's De Re Metallica (1556). Water enters at the top and exits at the bottom, powering the overshot wheel where, in junction with human labor, it crushes valuable ore-bearing rocks for further processing. This is an irreversible process even if the wheel is in constant circular rotation. For a good animated illustration of a returning water wheel in which the water to pumped back to the top to start the process again, see the Science Museum’s Old Bess returning Watt engine. This is not a free lunch because the steam engine must irreversibly consume coal to pump the water back. Returning engines were used during the early Industrial Revolution because water wheels provided more uniform circular motion for factories than the first steam engines could provide.

Moreover, an open economy like Greece that needs to import most of its essential commodities like energy, automobiles (remember Gregorios Sachinidis’s Mercedes 240D!) and pharmaceuticals, can only pay for them by exporting something of value to foreigners like tourism or shipping services (Greece’s two biggest exports)—unless of course the hated “troika” suddenly becomes willing to write them a blank check into the indefinite future.

So, as much as I agree with Greek Finance Minister Yanis Varoufakis that Eurozone austerity policies towards Greece have proven self-defeating and need to be thoroughly rethought, left-wingers like many influential members of Syriza still need to get real. Greece, despite the most radical internal devaluation of any Eurozone country, has a major export problem and desperately needs to find ways of putting its population back into gainful employment besides featherbedding the public employment rolls and electoral pandering to pensioners. (I reserve judgment whether the restoration of public broadcasting in some form is justifiable.)

Greece’s export performance (EL) seriously lags that of other EU bailout countries, despite more radical wage cuts (IE=Ireland, ES=Spain, PT=Portugal, LV=Latvia). Source: Böwer, Michou and Ungerer, “The Puzzle of the Missing Greek Exports,” European Commission, Economic Papers 518 (June 2014).

From Game of Turkey to Rock-Paper-Scissors: Musical Turkey for Greece?

With the Greek debt negotiations moving into their final genuinely unavoidably ultimate showdown this week, the game has incremented to a new and unprecedented level. Having started as a game of chicken (irresponsible brinkmanship), it quickly moved to what I called a game of turkey (second round postmortem blame game). This week, however, it has bootstrapped itself to yet a higher level: a three-way round-robin between Greece, the Eurogroup, and the IMF reminiscent of the famous rock-paper-scissors game dear to both children and game theorists.

Has the Greek debt game evolved to the next level: rock-paper-scissors between Greece, the Eurogroup, and the IMF?

First, why do we think the game has moved into its ultimate round (after previously predicting April 9, wrongly, as the moment of truth)? On May 12 Greece is scheduled to repay SDR 600,737,500 (around €763 million) to the IMF (after repaying SDR 157,331,282 on May 1). Since the Greek government, after plundering the cash reserves of various central government agencies to meet its last April 9 repayment, is now attempting to force all municipalities to transfer their cash balances to the Greek Central Bank, it must really be desperate and at its wit’s end (moreover, major cities like Athens have refused to comply).

But on Monday the Financial Times reported that the IMF is now insisting that any loosening of Greece’s primary surplus target (variously quoted as 3 or 4.5% depending on source and target year) be preceded by an explicit write off of Greece’s debt to be consistent with the IMF’s mandate to only bail out countries’ with sustainable sovereign debt loads.

Meanwhile, Pierre Moscovici, the European commissioner for economic affairs,  according to yesterday’s FT, now says that any discussion of debt restructuring can only take place after a program of reforms is first agreed with Greece. And Greece, in turn, has all along claimed that any reforms (with or without red lines) cannot be agreed until the primary surplus target is relaxed. Voila: paper-rock-scissors, or a European Catch-22! How this even more intricate impasse can be resolved is now anyone’s guess.

Needless to say, while this stalemate grinds on Greece’s growth and revenue prospects have only been rapidly deteriorating.

Have the Greek debt negotiations degenerated into a three-way standoff?

Sketches in European Solidarity II: Gregorios Sachinidis

    

Thessaloniki taxi driver Gregorios Sachinidis sitting for the last time behind the wheel of his record-breaking Mercedes-Benz 240D (4.6 million kilometers!) before donating it to the Mercedes-Benz Museum in 2004 (Pictures: DPA/DPAWEB via FAZ.net).

When I exploited Greek taxi driver Gregorios Sachinidis for my satirical post on the Greek bailout negotiations’ taxi connection/slander recently, I had no idea that Mr. Sachinidis really exemplified the outstanding spirit of cooperation that prevailed between Germany and Greece in the postwar period and replaced the sorry inheritance of World War II (and may be replaced in turn by the current animosity between the two countries). So let me briefly recapitulate his story in this new series I started somewhat sarcastically on Monday with Yanis Varoufakis and his channeling of ancient German battle cries (“Viel Feind, viel Ehr”), in the interests of international understanding (“Völkerverständigung”).

Mr. Sachinidis came to Germany at age 18 in 1963 as one of many “guest workers” from Greece, Turkey, Italy, Spain, Portugal and the former Yugoslavia to fill the labor gap of the postwar German “Wirtschaftswunder.” Fortunately, the powerful German unions had demanded that these “Gastarbeiter” (not to be confused with WWII “Zwangs-“ and “Sklavenarbeiter”) be paid and treated according to the regular collective bargaining contracts and not be exploited as an unprotected secondary labor market (in contrast to the recent trends of European integration). This didn’t mean that they didn’t wind up in the most undesirable housing at the margins of German society. Nevertheless, millions stayed on and benefited from the superior job opportunities Germany had to offer, sent their kids to German schools (from which many emerged as members of parliament and ministers), and largely integrated into this new and alien society.

Others, like Mr. Sachinidis in 1978, eventually returned to their home countries and invested their hard-won savings in new businesses. After 1981, when Greece first permitted Diesel taxis, Mr. Sachinidis saw his chance, and with the assistance of his brother, who had worked at Mercedes-Benz, managed to locate in Germany a used 240D, his dream taxi, and import it to Greece (being used, its deleterious effect on the Greek balance of payments was undoubtedly fairly minor). The rest is Guinness Book of Records history (not to mention that the 240D played a decisive role in impressing his fiancé enough in 1983 to marry him).

In the twenty-three-year taxi lifetime of his 240D Mr. Sachinidis proudly chauffeured such dignitaries around as German soccer star Gerd Müller (who we trust he did not overcharge) and transported humanitarian goods almost four hundred times to war-torn Serbia.

After donating the 240D to the Mercedes-Benz Museum, Mr. Sachinidis received a new C200 CDI from Alexander Paufler, president of Daimler Chrysler Hellas (after unfortunately committing the “faux pas” of having bought a French Peugeot as its replacement). Truly a heartwarming story of successful European solidarity!

 

Personal footnote: During the late 1970s, while a student at the University of Tübingen, I spent three summers building the successor model to Mr. Sachinidis’ 240D, the W123 series, at Mercedes’ main assembly plant in Sindelfingen. The amusing tales of industrial relations and Modern Times assembly-line surrealism will be, hopefully, the subject of future posts.

The successor model to Mr. Sachinidis’ 240D, the W123 series, of which I have fond memories from both the insides and outsides. (Picture: Wikimedia Commons)

 

A rare picture of me at the Mercedes-Benz plant in Sindelfingen, enjoying my summer vacations from studying economic complexity. (Picture: Wikimedia Commons)

Sketches in European Solidarity I

 

     

What goes around comes around in Western culture.

From the darkest depths of their collective subconscious, Europeans in their moments of crisis are waking up to the fact that they actually have much more in common than they had been aware of.

Thus, after his dressing down last weekend in Riga by the Eurogroup finance ministers as “a time-waster, a gambler and an amateur,” Greek Finance Minister Yanis Varoufakis tweeted back an honor-salvaging quote from American New Deal President Roosevelt:

He may not have realized that this quote actually places him firmly in the cultural camp of his prickly German counterparts, for it is only a variant of the 1513 battle motto of German Landsknecht commander Georg von Frundsberg at the Battle of La Motta:

Viel Feind', viel Ehr' ("Much foe, much honor"),

a philosophy that also stood German Kaiser Wilhelm II and German Führer Adolf Hitler in good stead in their respective (if somewhat flawed) battles for European ‘solidarity.’ Notice that the original German also has the advantage of being much more succinct and alliterative.

The Writing on the Wall: Grexit, Graccident, Grone. Is that Greek to You?

The writing on the wall may now be in Greek (“Grexit, Graccident, Grone”), but its meaning may not have changed much from Daniel 5:25–28: מנא, מנא, תקל, ופרסין
Mene, Mene, Teqel, Upharsin

Only now have commentators and the markets woken up to the fact that a Greek default and possible exit from the Euro might really be impending. They seem to have been lulled into complacency by the conviction that the Eurozone powers that be (EC, ECB, IMF, the EZ creditor countries, revolving submissive EZ debtor governments) have always been able to pull a rabbit out of the hat at the last minute since Greece initiated the sovereign debt crisis in 2010. Yet the writing on the wall has been visible for all to see since the end of the Samaras government in Greece and its replacement by the Syriza anti-austerity coalition, that is, since February.

Thus in yesterday’s Financial Times Wolfgang Münchau proposes that Greek default necessary but Grexit is not. Münchau ruminates

[I] wonder whether one or more people on both sides of these discussions may simply be miscalculating. We may be on the verge of one of those sleepwalking moments in European history.

“Sleepwalking” will be an expression familiar to the readers of this blog.

And today’s New York Times brings us Paul Krugman’s Greece on the Brink, a remarkably conciliatory piece for Paul implying that the negotiations between the Eurogroup and Greece have really been conducted in good faith on both sides. And if only men and women of good will would sit down together over retsina, it could all be worked out to the satisfaction of both parties.

While I cannot claim to have special insight into the minds and especially the subconsciousnesses of the negotiators, I read the present situation much more direly. As I already pointed out on April 1 (no joke), I think we have long ago moved from a game of chicken (i.e., irresponsible brinksmanship) to a game of turkey (i.e., a post-mortem blame game). And that the negotiations have long since ceased to be in good faith.

So why have the parties been keeping up appearances nevertheless? Let me answer by going over the points raised in Paul’s NYT op-ed.

1. “Don’t you think they want us to fail?” Paul was asked by many Greeks during his recent trip there. Maybe the answer really is yes, and for the reason Paul also gives: as an example for other opposition parties like Podemos in Spain against bucking the austerity line. And don't underestimate how much pure pique may be driving someone like Wolfgang Schäuble, who undoubtedly resents having to deal with deja-vu 1968 leftist types like Tsipras and Varoufakis publicly flouting the Eurocratic rulebook. Maybe “they” really intend to hang Greece out to dry as a warning to other obstreperous populists. The “success” of the Eurozone in containing the Cyprus crisis by imposing currency controls (but who ever heard of a currency union with currency controls on one of its constituents?) and depositor haircuts may have emboldened some into thinking a much larger containment exercise can also be surgically performed on Greece. After Lehman Bros. one is entitled to have some doubts.

Can Greece avoid a symbolic economic hanging out to dry? (Picture: Krakow civilians publicly hung in 1942 to deter resistance. Wikimedia Commons)

2. Paul sees the main problems as mostly already solved:

By late 2014 Greece had managed to eke out a small “primary” budget surplus, with tax receipts exceeding spending, excluding interest payments. That’s all that creditors can reasonably demand, since you can’t keep squeezing blood from a stone. Meanwhile, all those wage cuts have made Greece competitive on world markets — or would make it competitive if some stability can be restored.

Despite the immense internal devaluation (wage cuts), Greek exports, unlike in Ireland, Portugal and Spain, have decidedly not increased, nor have export prices declined (see the recent paper by Daniel Gros). Contrary to what Paul claims, Greece’s international competitiveness has not been restored despite all the suffering. Thus Greece really is a special case and a mystery to even fanatical adherents of austerity and internal devaluation. At least Ireland, Portugal and Spain can claim to see some light at the end of the tunnel, especially after the ECB’s QE (“Querency Easing”) Program, which has very effectively devalued the Euro (its very thinly veiled intention). But unemployment remains so high that the incumbent governments of these states still need to fear being voted out of office.

And one can attempt to squeeze blood from stone: the creditors still insist that Greece raise its primary surplus to the previous government’s promise of 3.5% this year (original troika target 4.5%) and 5 4.5% next year. But without a restructuring of Greece’s nominal debt and export surpluses Greece remains the German government’s worst nightmare—a bailout bottomless pit.

3. One can really question whether the Greek government is also actually negotiating in good faith (I have no doubt that the creditors aren't) and not rather rolling in self-righteousness as the valiant but doomed Don Quixotes tilting against Euroausterity windmills (see my taxi driver post). Of course the "taxi driver" slander may just be the limited prejudicial stereotyping of Greeks by northern European Eurocrats whose only knowledge of the country derives from contentious taxi trips between the airport and Athens hotels (while the Greek Finance Ministry hastened to dismiss this report).

There is a pipe dream current in Brussels that Tsipras can still prove his statesmanship in a volte-face, expel the leftwing of his party, form a new government with centrists, and in an act of brutal realism accept the same bailout terms his predecessor Samaras agreed to but also could not implement, the bailout terms that got Samaras voted out of office in the first place and were the bugbear that got Tsipras where he is today. But it is hard to see how he could preserve his self-respect if he did so, let alone the respect of the Greek electorate.

Thus I think many people are clutching at straws when it comes to repressing the Greek nightmare. But I have been proven wrong before.

Let us only hope that Daniel’s reading of the writing on the wall does not turn out to be the epitaph of the Eurozone:

And this is the writing that was inscribed: mina, mina, shekel, half-mina. This is the interpretation of the matter: mina, God has numbered the days of your kingdom and brought it to an end; shekel, you have been weighed on the scales and found wanting; half-mina, your kingdom is divided and given to the Medes and Persians.

No one knows what a Grexit/Graccident would look like, but Gustave Doré’s vision seems as good as any.

 

Update April 21, 13:18: European Commission President Jean-Claude Juncker, in an interview today in Politico, “ruled out a Greek debt default or exit from the eurozone…[He] said his main reason for optimism rests less on any tangible progress than on the simple fact that the alternative is unimaginable.”

I assume that until recently he and his colleagues in Brussels would also have ruled out the possibility that a copilot employed by a leading European airline would deliberately crash his plane with 149 passengers onboard as “unimaginable.”

This Eurocratic faith in human reason is immensely reassuring and now puts to rest the budding suspicion that at least some Europeans in responsible positions might actually have acquired a taste for suicidal self-destruction or ‘Götterdämmerung’ (European privacy laws prohibit us from giving full names at this point).

Update April 22, 15:26: It looks like the ECB’s Mario Draghi has been delegated to give Greece the coup de grâce after all: “European Central Bank Squeezes Greek Banks, Tightening Access to Loans,” New York Times April 21. None of the elected officials seem to have the b***s to do it (with apologies to Angela Merkel), despite Draghi’s insistence that it was ultimately their call. It is not the first, and undoubtedly not the last time Draghi will have to do the heavy lifting in the Eurozone. And EC President Juncker, as we have seen above, is still out in “unimaginable” lala land. And you thought the 2013 Tea Party Shutdown in the US was the height of government self-destruction!

The Krugman Twin Paradox (with Apologies to Albert Einstein!)

I posted my PINE-UCM slides yesterday around noon (Central European Summer Time) based on a talk I gave the evening before to undergraduates that attempted to break a lance for the centrality of multiple coordination equilibria, nonlinear dynamics, network and complexity theory in economics and finance. This is something I have been thinking about for a long time (see my 2010 presentation at the INET Budapest ‘Alternative Macrodynamics’ conference, available as a pdf file here). And of course I don’t claim to be the first person to think along these lines.

Then I took a train to Berlin, arriving around midnight, and checked my ‘usual suspects’ websites before going to sleep. And low and behold Paul Krugman had, in the meantime, coincidentally written a blog diatribe precisely on the subject of multiple equilibria and nonlinearity, apparently triggered by recent articles by Frances Coppola and Wolfgang Münchau (only the second of which, in Monday’s Financial Times, I had already seen—and don’t forget the Umlaut in his name!).

Of course it’s facile for non-card-carrying economic kibitzers to poke fun at the academics. And while I avidly and appreciatively read Wolfgang’s comments in both the Financial Times and SpiegelOnline and subscribe to his main points about multiple equilibria and nonlinearity, he really does not give any compelling substantive arguments for his claims. Both Coppola and Münchau seem (at least to professional economists) to be indulging in just armchair hand waving, at taking cheap shots. But why Paul Krugman should be so personally piqued by this discussion is puzzling.

His argument seems to boil down to essentially two parts:

1. “Been there, done that!”

True! In spades! In fact, Paul Krugman received the Nobel Prize precisely for his work in new trade theory and new economic geography, which also uses multiple equilibria and nonlinearity as central tools (nice bifurcations there, Paul). Something that in his modesty he doesn’t even mention in his diatribe. As have many other well-known, reasonably mainstream economists, such as Diamond and Dybvig on bank runs, as he points out. In my lecture I go even further back in time to Nicholas Kaldor’s 1940 Keynesian trade cycle model, and return to the present for Paul de Grauwe’s recent work on the dynamics of the Euro crisis. No argument here.

2. “That kind of stuff is too easy and too much fun”

Whoa! Since when were “easy” and “fun” incompatible with good science and now are a mark of opprobrium? Maybe it was too easy to generate spurious chaos models in the 1980s when it became clear how trivial it was to do with simple one-dimensional nonlinear discrete-time dynamics (remember the logistic equation?). But after that fad subsided, no serious scientist had any doubts that nonlinearity was of critical importance in lots of different fields (and why should economics be an exception?). Multiple equilibria (and even more complex dynamical regimes like limit cycles, chaos, and self-organized criticality) were shown to be certainly possible and important in an increasing number of domains. And this can be hard work, both theoretically and empirically (not that this is an essential criterion), not just idle fun and games for playful graduate students. So what’s going on here to turn Krugman against his own roots and better judgment? Fear of being flakey?

This does look like something that can only be explained by his psychoanalyst (in the unlikely event that he has one). Paul goes on to describe his own intellectual development:

And in my case, at least, I ended up with the guiding principle that models with funny stuff should be invoked only when clearly necessary; you should always try for a more humdrum explanation.

Well, I have no problem with Occam’s Razor, nor does any other scientist I know. If Paul can make sense of the present crisis using a simple, one-equilibrium IS-LM model augmented with a nonlinearity at the zero lower bound of interest rates, more power to him (and his prediction that inflation would be tame there despite the monetary expansion of the central bank seems to have been entirely on the mark until now). But if everyone was always a priori allergic to “funny stuff,” we would never have gotten relativity theory, quantum mechanics, or even the heliocentric theory of the solar system. So what gives? Are we now confronted with a multiple personality Paul Krugman who rejects the excesses of his youth? Who after going into orbit in the academic, journalistic and political worlds returns to the earth and now is an intellectually different person from the scientifically progressive twin personality he left behind (in analogy to the famous Einstein twin paradox)?

     

Paste together your own Krugman Twin Paradox by inserting the two bottom pictures into the Einstein Twin Paradox template above (left: PK, exceptionally, on extreme right with an 1976 IMF delegation in Lisbon; right: PK in an interview with ABC television in 2014). Replace the word “relativity” with “macroeconomics.”

Coming up: Multiple equilibrium models—do they really make any difference at the zero lower bound, or are they just Hicksups?