Monday, March 30, 2009

Hoover Economics – Czech Style

Is Czech prime minister Mirek Topolánek looking to write for the National Review? While he acknowledges the global recession, he also writes:

Even high-quality medicine, if administered in excessive doses, can be harmful or, if used permanently, cause unhealthy addiction. That's why I have been repeatedly calling on countries, within as well as outside the EU, to be prudent. I used the rather hyperbolic simile of the “road to hell” in my speech to the European Parliament last week to warn against the danger of temporary measures - such as excessively increasing public borrowing, nationalising or subsidising banks and industries, putting up protectionist barriers or enforcing “buy American” clauses - becoming permanent. It was in this context that I referred to the adverse experience of protectionism and state intervention in the US in the 1930s ... I do not need to explain that the welfare states of Europe act as “automatic stabilisers”, sustaining consumer spending even in a slump. This means that Europe does not need such a large fiscal stimulus compared with the US, which does not have such a system of social support. I also believe that as the President of the European Council I do not need to explain that the situation in the EU is different from that in the US in a further way - the EU cannot choose to apply a wide-scale financial stimulus. Even though the Czech Republic is not a member of the eurozone, I do not need to explain the vital importance of the rules of the Stability and Growth Pact that restrict the size of a country's budget deficit and national debt. Or do I?

While I am not in favor of using trade protection to bolster U.S. net exports (something about the prospect beggar thy neighbor retaliation), Smoot Hartley was not the cause of the Great Depression. Nor was the New Deal. As far as a potential defense of the Buy American provisions that Topolánek criticizes, let’s turn the microphone over to Paul Krugman:

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt. As I explained a while back, this means that the bang per buck on stimulus for any one country is less than it is for the world as a whole. And this in turn means that if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.

Topolánek now advocates the lack of fiscal stimulus that worried Paul. If the European economy were currently facing excess aggregate demand, this call to adhere to the Stability and Growth Pact would make sense. Otherwise, it is the kind of Hoover economics that Republicans in Washington are also advocating.

Update: Paul Krugman has more:

Like many other economists, I’ve been revisiting the Great Depression, looking for lessons that might help us avoid a repeat performance. And one thing that stands out from the history of the early 1930s is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate. The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.” Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight. But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.

Ian Traynor reports that the European leaders are likely not going to listen to President Obama:

The case pushed by Merkel repeatedly in recent weeks, and echoed by France and the European commission, is that there is no point now in more tax cuts and deficit spending to boost demand since it is not yet clear whether the huge fiscal stimuli packages already launched are actually going to work … the European leaders are indeed worried that Obama's huge public spending programmes could fuel hyper-inflation and leave Europe struggling to refinance colossal levels of state debt if they followed suit.


Brenda Rosser said...

..If the European economy were currently facing excess aggregate demand, this call to adhere to the Stability and Growth Pact would make sense....

Wouldn't you say that most world economies are facing 'excess aggregate demand' of the wrong type of product or service??

The head of the IPCC is urging citizens to reduce their consumption in order to have a chance to enjoy a habital planet in the future. What an extraordinary thing to say!

His words, however, convey nothing new. The alarm keeps ringing whilst Krugman and fail to constantly qualify their banal statements to fit the current horrendous predicament: our warming and drying planet drowning in greenhouse gases, other industrial toxins.

Yet the constant urgings for 'consumption' go on.

'Economy' never did mean the wasteful frittering away of time, energy and resources.

Global warming could cut the human population to 1 billion said Hans Joachim Schellnhuber, director of the Potsdam Institute for Climate Impact Research. if the buildup of greenhouse gases and its consequences pushed global temperatures 9 degrees Fahrenheit higher than today — well below the upper temperature range that scientists project could occur from global warming — Earth’s population would be devastated….at certain “tipping points,” higher temperatures could cause areas of the ocean to become deoxygenated, resulting in what he calls “oxygen holes” between 600 and 2,400 feet deep. These are areas so depleted of the gas that they would badly disrupt the food chain...

Scientist: Warming Could Cut Population to 1 Billion
By James Kanter

Sandwichman said...

Dean Baker's stimulus proposal wouldn't have the policy externalities Krugman worries about.

TheTrucker said...

In 2002 I was appalled at the fact that Republicans did not lose the House of Representatives. That is when I started my investigation into government structure and our electoral system. I was already aware of the games played in the precincts by the Republicans but I simply could not believe that the counts would have been close enough to allow the theft. I just could not believe that the American people were than damned stupid. In the current phase of the analysis, 6 years later, I am of the opinion that ignorance, rather then stupidity, accounts for the successes of the latter day Republican party. And I mention this here because I feel strongly that all conservatism is supported by an overdose of the "work ethic" and the admonishment of idleness that comes with Republican moralizing. The true intent of this "thou shalt work 2 jobs" is to keep the people occupied and ignorant. If government were to reduce the hours of work then many people would cure themselves of the ignorance and turn their minds to reducing the need for labor still more (no sane person _LIKES_ toil).

Given time to think and reflect, the people would more fully understand how the current leaders (Republican and Democrat alike) are nothing more than lobby suck ups. Many people would come to understand _REAL_ economics and be able to see past the neoclassical tap dancing; to see the shaft they are getting from the lobbyists and the politicians alike.

Idle hands may be the Devil's workshop, but those minds set free from toil are the bastion of enlightened progress. It is the conservative desire for political power and the fear of losing such political power that is the major impediment to cutting the work week in the United States. Power is zero sum.

And the primary cure for this malady is a major expansion of the membership of the House. Such an expansion dramatically reduces electoral district size and places the, so called, representatives logically (if not physically) closer to those being represented. As representatives are more representative of the people then so too are they less representative of the lobby. You will note that all the nations that have decent "safety nets" also have very good per capita representation in the lower house, or popular branch, of the government. In the USA 1 representative lords it over 700 thousand people. In the UK it is one rep per 100k or so and in Scandinavia only 15-20k are forced to share one vote on the laws. IN smaller constituencies, those that vote for big business at the expense of the people find themselves in the street.

TheTrucker said...

Brenda Rosser said...

"Wouldn't you say that most world economies are facing 'excess aggregate demand' of the wrong type of product or service??"

Yes. The "product or service" being sought at present is "income". If income is to be from wages then per hour wages must be better distributed across the population and so too the purchasing power. Many, if not most, people would rather work less (hours) and consume less. The 30 hour work week and national health insurance are the correct address to this problem.

The ridiculous claim that people seek jobs is exposed for what it is. Nobody _WANTS_ a stinkin job. What one wants is income and the "job" (labor) is the cost of that income.

Brenda Rosser said...

Thanks for your feedback Trucker.

Yep. The "product or service" being sought at present is "income". 'Real' income, that is.