April 25, 2012 · 0 Comments
Could it be that Europe’s financial and political elites are finally coming to a “d’oh!” moment, when an unbroken string of policy failures and the simple logic of “depression plus austerity = worse depression” [Paul Krugman, Europe's Economic Suicide, NYT, 4/15/2012] finally begin to get through?
Half a dozen Euro nations are now officially in recessions, others nearly so, having accepted a common view that sustained austerity would breed confidence fairies that lead to growth and jobs. Instead, they’ve seen minimal or negative growth over the last two quarters, while their populations are facing depression level unemployment and impoverishment that show few signs of improving. Few theories have ever been so thoroughly tested and so thoroughly failed.
The destructive consequences of imposing austerity — depressing government and/or private spending in the middle of a serious recession — were predictable from standard economics text books and repeatedly predicted by Paul Krugman and many others, all still ignored prophets in their own lands.
In America, despite clear world-wide evidence their theories are a disaster, deficit hysterics still permeate both parties, religiously in one party, foolishly in the other, and unforgivably among the White House political advisers. (Why hasn’t a failing President with his reelection on the line fired this entire team?) Together, this ship of fools has effectively blocked all efforts to even examine the devastation wrought by state austerity measures and insufficient federal spending, worsened by flirtations with grand bargains, government shut downs and pending automatic spending cuts. Unfortunately, in America there is no one on the ballot arguing for any meaningful remedies.
In Europe, however, political leaders are paying a price for their indifference to suffering and logic. The political/financial elites insisted the confidence fairy would return as soon as they’d squeezed enough wealth out of the their own populations. When the anemic patient got even weaker, they applied even more leeches. But now several governments have fallen — Greece, Italy, Spain, and the Netherlands, and next perhaps France — and more are threatened because voters are fed up.
The public generally doesn’t know what the technical economic solutions are, and the media keeps telling them, falsely, there are no good alternatives, because the deficit hysterics still control a conversation disconnected from the reality staring them in the face. But voters now know their elites don’t have a clue and don’t seem to care that the elite solutions fashioned mostly for banks and bond holders are worsening the human suffering without solving any underlying economic problems.
From [Monday's] New York Times:
Citizens from Prague to Paris to Amsterdam have made it abundantly clear the last few days that they are tired of the economic austerity forced on them by the euro zone debt crisis.
But as the budget-cutting pain of reduced government benefits and social services brings protesters to the streets and drives support for nationalist or far-left parties, it is not clear what the economic alternative might be. Rejecting austerity budgets in favor of more government spending will not automatically ensure economic growth, many economists say.
“The last thing these economies need is a debt-financed stimulus program,” said Jörg Krämer, the chief economist of Commerzbank in Frankfurt.
Well, I suppose if you lead off with the chief economist of a large German bank, that’s what you’ll get. A few paragraphs down, we hear counter rumblings:
As more European countries teeter on the edge of recession or slip into one — Spain, on Monday, was the latest to slide — even the policy-making elite has begun to question whether Germany and the European Central Bank have gone too far in insisting that fiscal discipline is a prerequisite to growth.
Ya think? So let’s ask the IMF and the US gurus:
“A global, undifferentiated rush to austerity will ultimately prove self-defeating,”Christine Lagarde, the president of the International Monetary Fund, said at the fund’s spring meeting in Washington on Saturday.
But Ms. Lagarde also acknowledged the quandary facing European leaders. Most of them simply do not have the resources to pay for public works projects or social programs that would ease the pain of rising unemployment and declining wages.
At the monetary fund meeting, Treasury Secretary Timothy F. Geithner continued his call for Europe to at least temporarily set aside budget cutting and engage in the sort of government spending stimulus that the Obama administration prescribed for the American economy in 2009.
Sigh. The article searches for more views, but the Times can’t seem to differentiate between countries flat on their backs and bleeding to death — e.g., Greece, Portugal, Spain – which should stop being asked to donate blood, and those capable of rendering assistance because they aren’t close to being overly indebted, whatever that means. And like many articles of this type, there’s no effort to explain that if your trade balance isn’t overly positive and your private sector is trying to reduce private debt (e.g., from a housing bubble), that government deficits are mathematically unavoidable unless you really want to tank your economy by reducing deficits at the wrong time — which is what many have done.
You have to search a bit to find the analyses that explain that countries with debts mostly in their own currencies — the US, Japan, UK — are in no danger of default, which is partly why their interest rates are very low now, while those currently locked into a common currency they don’t control are in a monetary straight jacket they can’t solve alone. It takes lots of cheap lending from a real central bank and/or either getting out of the half a monetary union or getting into a full fiscal union. The latter would come with transfers and automatic, federally funded stabilizers that expand during recessions, so that your member state economies don’t have to contract just to balance a state budget. So yes, we should be pouring federal dollars into states to keep their economies and state services from collapsing.
The bottom line is, this stuff is hard, but not that hard, and there are plenty of smart people who know how to think about this rationally and who know what to try/do. But at this point, none of those people are in charge in any of the countries that are either causing economic harm or responsible for fixing it, including America.