Thursday, April 26, 2012

Europe: Ignorance Does Not Even Remotely Resemble Bliss

The public debate over European austerity, so long overdue, is now breaking out.  The baby steps of Hollande in France, the double dip in England, the difficulty in assembling an austerity coalition in the Netherlands and the first big anti-austerity demonstration in the East (Czech Republic) are all signs that fiscal orthodoxy is under siege.  The backdrop, of course, is the descent of much of Europe into recession when the recovery from the financial crisis has barely begun.  Given that officials have postponed a reckoning with the losses amassed by the banking system, this is a recipe for an even greater disaster.

What stands out at this point is the extraordinary ignorance displayed by the defenders of austerity.  Whether this is honest ignorance or the cynical kind is difficult to say, but in either case it should be shown for what it is.

Let’s take two comments culled from this morning’s New York Times coverage.  First we hear David Cameron, the British PM, in what has become the mantra of the austerians: “More debt and more spending is what got us into this problem. It can’t be the solution of the problem.”

1. Except for Greece, public sector deficits were modest and generally declining in the runup to 2008.  In what sense did public spending provoke the collapse of the global financial sector in the fall of that year?

2. Fiscal deficits ballooned in response to the crisis; they were a symptom rather than a cause.

3. It was actually private debt that got us into this mess.  Public debt has expanded to limit defaults and partially take up its role in sustaining spending.

4. Lack of spending is surely the core issue at present.  Demand for goods and services is depressed, workers are out of work, and investment is anemic.  Borrowing is how spending expands in advance of income.  Either the private sector has to take on more debt or it’s the public sector’s job.  But the private sector is justifiably deleveraging.  Governments that can print money need to take up the slack.  When income growth revives, public borrowing can recede.

Not a single word of this quote is defensible.  That includes “and” and “the” (both of them).

Now listen to Draghi.  Arguing against fiscal stimulus, he says, “If one thinks you can increase demand by increasing deficits, then how come we don’t have higher demand?”

1. Again, the fiscal deficits are a symptom of the slump.  We got drastically lower demand, and then we got deficits.  Draghi might as well ask, if crutches are so good for getting around, why don’t we see more people on crutches in the Olympics?

2. The austerians are demanding that deficits shrink.  This will decrease demand and intensify the slump.

3. The deficits are doing less than they should to stimulate demand because a portion of government spending, especially in places like Ireland and Spain, is going to bail out the financial sector.  With no EU-level plan to either bail out or resolve finance, it is left to individual countries to do this.  Since Draghi is not doing the job a real central banker should be doing, at least he can stop criticizing those who are trying to do some of it for him.

Just as irrationally, Draghi goes on to say that growth can come only from structural reform that makes economies more efficient.  Huh?  That’s about the growth of supply, not demand.  True, if an individual country gains in efficiency relative to the others, and if its exchange rate doesn’t adjust (perhaps because it has given up its own currency), then, yes, it can boost its demand through an increase in net exports.  But this is a zero-sum game overall.  Rebalancing is important for averting the structural forces that create unsustainable debts, but that has little to do with aggregate demand across the system.

So what I propose is this: expose the absurdities of austerian arguments every day.  Don’t let any of it pass.  Let’s get to the point where denying basic economics is like denying climate change, where ordinary people can see that the controversy is an expression of who is paid to say what, not the underlying science.

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