Why I am skeptical about Romania(published on 22.02.2012)

Often enough people mistake my skepticism for pessimism. Especially those that are activating in the political arena and with whom I happen to disagree. Most of the time my reply is that I try to be as realistic as possible and assess the situation based on their policies. Last time I was called a pessimist last night on a TV show. Besides the answers given last night the graph below shows another reason for being skeptical regarding long term prospects of the Romania.

In the last three years potential GDP growth moved from 6% to almost zero while the public debt doubled as % of GDP. I hope now the source of my skepticism clear. (red and blue lines two different measures of potential GDP growth on the left axis).

12 thoughts on “Why I am skeptical about Romania(published on 22.02.2012)

  1. I can relate with this. A few months back I had a debate with a couple of my relatives, I have too many relatives.🙂

    I told to a communist aunt that she’s unlikely to get any pension(or the pension be worth anything) in 3 to 5 years or even earlier if nothing major changes in Romania. She couldn’t believe it.

    I told her: “It’s just basic math.” When she heard the word “math”, she dismissed it like math doesn’t have anything to do with the economy. She was the same person who helped her son burn through about 40.000 euros(borrowed and received as wedding gifts) and now he’s in debt for the next few decades. Imo, she’s basically economically illiterate.

    Another of my relatives, asked me about the future, will the future bring another crisis. I said: “I don’t know. No one knows the future. I can only say that if this trend continues the way it was for the past couple of years, it will be pretty bad.”

    The difference between me and most of my relatives is that they do not want to consider the possibilities. They tend to look only at the bright side when it comes to the future. And mostly at their problems and not solutions when it comes to the present.

    This situation reminds me of an article wrote by Paul Graham(A word to the resourceful):
    http://paulgraham.com/word.html

    Here’s a quote from the article:
    What it means is that if someone is wise, all you have to do is say one word to them, and they’ll understand immediately. You don’t have to explain in detail; they’ll chase down all the implications.

    In much the same way that all you have to do is give the right sort of founder a one line intro to a VC, and he’ll chase down the money. That’s the connection. Understanding all the implications—even the inconvenient implications—of what someone tells you is a subset of resourcefulness. It’s conversational resourcefulness.

    Like real world resourcefulness, conversational resourcefulness often means doing things you don’t want to. Chasing down all the implications of what’s said to you can sometimes lead to uncomfortable conclusions. The best word to describe the failure to do so is probably “denial,” though that seems a bit too narrow. A better way to describe the situation would be to say that the unsuccessful founders had the sort of conservatism that comes from weakness. They traversed idea space as gingerly as a very old person traverses the physical world.

    The unsuccessful founders weren’t stupid. Intellectually they were as capable as the successful founders of following all the implications of what one said to them. They just weren’t eager to.

    1. @Adrian
      Thanks for the referral.
      On the analogy I think there is a small difference. I do not expect that just about anyone would be aware of the current economic situation. But I would expect those in charge to know what is going on.

      1. “I do not expect that just about anyone would be aware of the current economic situation.”
        It’s not a question of expectation, but an attitude. When they are presented with something that may upset their beliefs, they close in. They don’t even consider the possibilities. They prefer to believe a comfortable lie rather than to look at the situation realistically and to actually consider more of the data.

        And it seems that this mechanism based on self deception works at any level. Anyone does it, just some people do it almost everywhere.

  2. And to keep pushing my favourite idea (of the moment, that is)

    Don’t you think this sort of rise of the debt/GDP ratio is what would happen if NGDP was allowed to fall ? (after all, debts are nominal) … One more reason to target NGDP – and not arbitrary constructs like inflation.

    1. @Daniel
      I was reminded of you when reading this http://www.washingtonpost.com/business/modern-monetary-theory-is-an-unconventional-take-on-economic-strategy/2012/02/15/gIQAR8uPMR_story.html
      Now, I am not sure NGDP was allowed to fall. It fell as a response to some negative shock. The polices that followed pushed it further, that is true.

      My biggest problem with MMT is that you need government or public policies to push NGDP further. Setting an NGDP target it means that public resources will be used to achieve that target. And I get very uneasy when it comes to an economy where the government has this much power. Another way to push the economy is to tax as little as possible (close to zero ) labor and capital and just make sure you set up an environment for competitive markets to flourish.

      For a guy growing up in Romania targeting NGDP resembles too much the policies of the communist regime. I know it is strong but last not I was called a fascist on national TV for saying that Greece is better of out of EURO. So do not get offended. I just do not trust a government with such an important target as the national GDP.

      1. Hmmm … MMT aka neo-chartalism ? Why would that remind you of me ? If I were to label myself, I’d choose “market monetarist”.

        And hey, I’m all for free banking – but I’m also aware that it’s a political impossibility (getting rid of central banks, that is)

        The next best thing would be putting banks on an auto-pilot. Hence my support for NGDP targeting.

  3. I had no doubt that Daniel was here spreading his religious NGDP and AD fallacies.😛

    Friedman even said Fisher was the greatest American economist, and I think that is correct. Fisher had a broader understanding of the economy in a very, very critical way and in a way that I don’t think either Friedman or John Maynard Keynes understood it, and even a lot of contemporary economists, such as Ben Bernanke. Keynes and Friedman both felt that The Great Depression was due to an insufficiency of aggregate demand and so the way you contained a Great Depression was by your response to the insufficiency of aggregate demand. For Keynes, that was by having the federal government borrow more money and spend it when the private sector wouldn’t. And for Friedman, that was for the Federal Reserve to do more to stimulate the money supply so that the private sector would lend more money. Fisher, on the other hand, is saying something entirely different. He’s saying that the insufficiency of aggregate demand is a symptom of excessive indebtedness and what you have to do to contain a major debt depression event — such as the aftermath of 1873, the aftermath of 1929, the aftermath of 2008 — is you have to prevent it ahead of time. You have to prevent the buildup of debt.

    … yadda-yadda-yadda…

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