Third German Interview Of James Galbraith On Inequality

This interview focuses on inequality between nations in the eurozone.  Galbraith made several interesting observations that I have summarized.  The interview is well worth reading in its entirety.

Galbraith's general perspective on inequality growth is based upon credit cycles.  They create booms and busts that determine winners and losers.  In this case, countries on the periphery over leveraged on credit during the boom and now they are deleveraging during the bust.  That is increasing inequality between the states within the eurozone.  Moreover, unlike the US, the eurozone does not have a transfer union to redistribute income from one region to another.  Inequality between geographic areas in the US have been reduced dramatically by transfers to individuals via Social Security, Medicare; and other government programs such as defense spending and infrastructure investments that have been concentrated in the poorer southern states.

The idea that structural reforms in the peripheral countries can reduce inequality is nonsense.  Economic activity concentrates in competitive areas.  Northern Europe is more competitive than Southern Europe and there are not compensating mechanisms in Europe.  This is especially true at the individual level. In the US, government programs to individuals act as an income redistribution mechanism.  There is no income redistribution mechanism in Europe.  There will population redistribution instead.  Professionals, and other individuals with marketable skills, will migrate to countries with job opportunities.

The idea that countries on the periphery in Europe can become more competitive, and that this will enable them to finance their budget deficits at lower rates is a fantasy.  Once investors realized that debt in these countries was not guaranteed by membership in the eurozone, there has been a flight to safer investments.  Funds are flowing to Germany and other places that are believed to be safer.

Trade between the core nations and the periphery has also increased inequality between them.  Greece and Portugal, in particular, are the largest importers of military weapons relative to their size.  In Greece, spending on defense is better explained as a payoff to military leaders than it is by fear of attack.  They have purchased their tanks and submarines from Germany and France.

At the beginning of the crisis in Greece, the major concern was how to protect the German and French banks that were the major creditors.  The financial assistance to Greece was recycled as a flow of funds to those banks which ultimately were compelled to write down their loses.  In order to sell the financial aid to the public it was necessary to argue that Greece had to pay for its sins.  Austerity was the necessary penalty for their sins. It is not clear whether politicians really believe what they say about paying for sins, but it is certain that politicians know what they have to do in order to win popular support for their policies.