Monday Reads: Can we get back to real Economics now?

Good Morning!

It certainly has been a tough few years for reasonable people. We’ve had to endure a repeat of the same old things that didn’t end the Great Depression the first time remixed and put into failed policies in both Europe and the U.S.

The very act of believing something doesn’t make it real or true.  Yet, a group of so-called conservatives have been recently led by blind faith in tropes and canards.  They followed all the failed policies instead of  what we’ve learned that works when dealing with market economies and their cycles over the last 100 years.

It seems voters in a lot of countries are waking up and voting out all those second comings of Herbert Hoover.  Austerity economics hasn’t worked for the majority of us.

Paul Krugman has been outspoken about the wrong thinking that’s contaminated the political class here and Europe.  There appears to be a group of people out there determined to un-write the history of the 1920s and 1930s. His new book tries to outline what we’ve known since the Roosevelt years and why the plans foisted on us by so-called conservatives were bound to fail.  I have no idea why discredited economic thoughts were brought back into vogue by the banking classes, the investment classes, and pushers of bad pulp fiction narratives like Paul Ryan and his slavish Randian/Austrian ideology. Why do modern politicians pick up the economic version of flat-earth geology and then expect the economic equivalent of a successful launch of a rocket to Mars?

The Austerian desire to slash government spending and reduce deficits even in the face of a depressed economy may be wrongheaded; indeed, my view is that it’s deeply destructive. Still, it’s not too hard to understand, since sustained deficits can be a real problem. The urge to raise interest rates is harder to understand. In fact, I was quite shocked when the OECD called for rate hikes in May 2010, and it still seems to me to be a remarkable and strange call.
Why raise rates when the economy is deeply depressed and there seems to be little risk of inflation? The explanations keep shifting.

Back in 2010, when the OECD called for big rate increases, it did an odd thing: it contradicted its own economic forecast. That forecast, based on its models, showed low inflation and high unemployment for years to come. But financial markets, which were more optimistic at the time (they changed their mind later), were implicitly predicting some rise in inflation. The predicted inflation rates were still low by historical standards, but the OECD seized on the rise in predicted inflation to justify a call for tighter money.

By spring 2011, a spike in commodity prices had led to a rise in actual inflation, and the European Central Bank cited that rise as a reason to raise interest rates. That may sound reasonable, except for two things. First, it was quite obvious in the data that this was a temporary event driven by events outside of Europe, that there had been little change in underlying inflation, and that the rise in headline inflation was likely to reverse itself in the near future, as indeed it did. Second, the ECB famously overreacted to a temporary, commodity-driven bump in inflation back in 2008, raising interest rates just as the world economy was plunging into recession. Surely it wouldn’t make exactly the same mistake just a few years later? But it did.

Why did the ECB act with such wrongheaded determination? The answer, I suspect, is that in the world of finance there was a general dislike of low interest rates that had nothing to do with inflation fears; inflation fears were invoked largely to support this preexisting desire to see interest rates rise.

The Europeans have had it with the nonsense.  They’ve watched their economies and jobs be drained by bankers drunk on casino style betting in financial markets that pass their chits to taxpayers.  The first major European leader–Nicholas Sarkozy–has been replaced. Will the French be able to put the out-of-control financial sector back into its proper place?

Mr Hollande – the first Socialist to win the French presidency since Francois Mitterrand in the 1980s – gave his victory speech in his stronghold of Tulle in central France.

He said was “proud to have been capable of giving people hope again”.

He said he would push ahead with his pledge to refocus EU fiscal efforts from austerity to “growth”.

“Europe is watching us, austerity can no longer be the only option,” he said.

After his speech in Tulle, Mr Hollande headed to Brive airport on his way to Paris to address supporters at Place de la Bastille. His voice hoarse, he spoke of his pride at taking over the mantle of the presidency 31 years almost to the day since Socialist predecessor Francois Mitterrand was elected.

“I am the president of the youth of France,” he told the assembled crowd of tens of thousands of supporters, emphasising his “pride at being president of all the republic’s citizens”. “You are a movement that is rising up throughout Europe,” he said.

Mr Hollande has called for a renegotiation of a hard-won European treaty on budget discipline championed by German Chancellor Angela Merkel and Mr Sarkozy.

Robert Reich writes that this is a chance to reform capitalism.  It is highly unlikely that France will move to make public any private assets.  What it will do is turn its economic future to what works for growth for a country and not the enrichment of the wealthy and powerful few.  Financial Markets should not be turned into gambling casinos via government engineering.

During the Depression decade of the 1930s, the nation reorganized itself so that the gains from growth were far more broadly distributed. The National Labor Relations Act of 1935 recognized unions’ rights to collectively bargain, and imposed a duty on employers to bargain in good faith. By the 1950s, a third of all workers in the United States were unionized, giving them the power to demand some of the gains from growth. Meanwhile, Social Security, unemployment insurance, and worker’s compensation spread a broad safety net. The forty-hour workweek with time-and-a-half for overtime also helped share the work and spread the gains, as did a minimum wage. In 1965, Medicare and Medicaid broadened access to health care. And a progressive income tax, reaching well over 70 percent on the highest incomes, also helped ensure that the gains were spread fairly.

This time, though, the nation has taken no similar steps. Quite the contrary: A resurgent right insists on even more tax breaks for corporations and the rich, massive cuts in public spending that will destroy what’s left of our safety nets, including Social Security and Medicare and Medicaid, fewer rights for organized labor, more deregulation of labor markets, and a lower (or no) minimum wage.

This is, quite simply, nuts.

Krugman reminds us that Spain was a prudent and financially responsible government prior to the speculative mortgage bubble brought on by banks.  It did them no good in their current downturn.

For this is really, really not about fiscal irresponsibility. Just as a reminder, on the eve of the crisis Spain seemed to be a fiscal paragon:

What happened to Spain was a housing bubble — fueled, to an important degree, by lending from German banks — that burst, taking the economy down with it. Now the country has 23.6 percent unemployment, 50.5 percent among the young.

And the policy response is supposed to be even more austerity, with the European Central Bank, natch, obsessing over inflation — and officials claiming that the incredibly foolish rate hike last year was actually something to be proud of.

Greece too has voted against the Austerity Agenda.

Alexis Tsipras became the surprise package of the Greek election by telling Angela Merkel to get lost.
“The people of Europe can no longer be reconciled with the bailouts of barbarism,” Tsipras, 37, said on state-run NET TV late yesterday after his Syriza party unexpectedly came second in the country’s election. “European leaders, and especially Ms. Merkel, should realize that her policies have undergone a crushing defeat.”

Tsipras’s calls to tax the rich, delay debt repayments and cut defense spending struck a chord with voters angry at austerity measures imposed by the European Union and the International Monetary Fund in return for bailouts. As far as euro membership is concerned, Tsipras told voters that a Greek exit would put the currency itself in jeopardy and they shouldn’t feel “blackmailed” into more austerity.

The result put Syriza ahead of the Socialist Pasok party, potentially derailing efforts to implement the terms of the country’s financial lifeline. Syriza, which means Coalition of the Radical Left, won 16 percent of the vote, projections showed. That exceeded the 13 percent won by Pasok, one of the two pillars of the political establishment since 1974. New Democracy, led by Antonis Samaras, topped the poll with 20 percent.

Rachel Maddow borrows some analysis from Ezra Klein to show how the UK has been tanking its own economy with its austerity agenda and how closely our own problems resemble the UK government induced recession.

Once President Obama took office and the Recovery Act/stimulus began putting capital back into the economy, the U.S. economy began growing again. In the U.K., the economy started to improve, right up until British officials began implementing an austerity agenda — at which point the national economy stagnated and slipped back into a recession.

Obama rejected austerity, and as a result, American growth, while fragile and insufficient, is easily outpacing Europe’s and UK’s, where austerity measures have ruled the day.

Americans should care about this, if for no other reason because of interconnectivity of the modern global economy. But there’s also a purely political perspective to keep in mind: namely, the problem of Republican predictions.

In short, American conservatives got everything backwards. When Obama’s policies began, Republicans said they wouldn’t generate economic growth, but GOP officials got it backwards. When David Cameron’s austerity policies began, Republicans were not only certain they would work, they pleaded with American policymakers to follow the Tories’ lead.

And we now know GOP officials had this backwards, too.

The remarkable thing is, Republicans aren’t the least bit chastened by their track record of failure.

They said Clinton’s economic policies would fail miserably, but that’s not what happened. They said Bush’s economic policies would produce extraordinary prosperity, but that’s not what happened. They said Obama’s economic policies would make the Great Recession worse, but that’s not what happened. They said Cameron’s economic policies in the U.K. would work brilliantly, but that’s not what happened.

And now these same Republicans are saying they deserve Americans’ votes in 2012 because they have credibility on the economy.

Here’s one  last Krugman analysis of what the austerity agenda has done in the U.S.  Private employment has recovered to pre-recession levels. That’s not true for public employment.

Here’s a comparison of changes in government employment (federal, state, and local) during the first four years of three presidents who came to office amid a troubled economy:

That spike early on is Census hiring; once that was past, the Obama years shaped up as an era of huge cuts in public employment compared with previous experience. If public employment had grown the way it did under Bush, we’d have 1.3 million more government workers, and probably an unemployment rate of 7 percent or less.

Here’s evidence that Obama is not growing the public sector as Mittens claims. These numbers represent thousands of teachers, health workers, scientists, highway workers. and public safety officials.

Here’s one last thought from the Economist: “The election will determine whether a nasty dose of austerity can be avoided.”

AMERICANS have watched austerity sweep Europe with a certain Schadenfreude. But eight months from now they may get a dose of the same medicine. The political compromises that have produced much of America’s deficit of 8% of GDP are programmed to go into reverse at the end of the year, two months after the election. A stimulus package consisting of a payroll-tax cut, investment tax credit and enhanced unemployment insurance expires then, as do George W. Bush’s tax cuts (which have already been extended by two years from their original end-date of 2010). At the same time an automatic, across-the-board cut in domestic and defence spending, called a “sequester”, takes effect, cutting about $100 billion from government spending next year.

The economic impact of this fiscal cliff is a matter of some debate. The Congressional Budget Office reckons that the combined effects of the sequester and the expiring tax cuts would add up to 3.6% of GDP in fiscal 2013. But David Greenlaw of Morgan Stanley, which puts the total effect at almost $700 billion at an annual rate, argues that the calendar-year impact is much larger, at around 5%. Others think the effect would be smaller, noting that some people will not experience the full tax hit until they file their returns in 2014.

Even the lower estimates could easily be enough to tip the economy back into recession.

These tax cuts have not been as successful as other forms of fiscal policy might have been.  However, austerity measures taken in many states has been somewhat offset by these Federal Policies.  It will be interesting to see how long the economy will hold out under current conditions if and when these things expire. It’s simply been a mind boggling process to watch so many countries unleash unregulated financial innovations and low interests rates then bail out for the financial sector after its bets went bad.  It’s been even worse to watch the victims of this excess be forced to pay for the results of government supported speculative bubbles.  I’m wondering exactly what the results of these elections will bring to Europe and how our own electorate will act in the fall.

So, I depressed you with a lot of dismal science stuff today.  What’s on your reading and blogging list?

40 Comments on “Monday Reads: Can we get back to real Economics now?”

  1. ecocatwoman says:

    First, Kat, this post actually gave me hope instead of depressing me. What did keep going round and round in my head is the fact that the European electorate is much better informed than is the American electorate. I kept wondering if one of the reasons that so-called conservatives have pushed the Socialist label on our, at best, middle of the road president is because they saw Europe heading in that direction. Demonizing both Europe & socialism as the new Axis of Evil would turn the general public off from listening closely to what the people of Europe (as well as the Occupy movement) are saying. The Right only wins when they convince enough people to vote against their own self interests. The one ray of hope that I see for the fall elections is Obama’s own likeability and charm. That’s not a personal endorsement of his policies to date, just the fact that his personality far outshines robotic Romney’s lack of any sign of a personality. Now if only Obama will jettison the Wall Street advisers and listen to Krugman & Reich and others like them. Hopefully Obama is listening to what the people in Europe are saying. Corporations may pay for elections but it is people who actually vote & have the power to elect a president.

    Absolutely fantastic post. I’ll say it again – you make economics understandable and interesting to this lay person.

    • bostonboomer says:

      Well, we did a little bit better than Europe because of the stimulus, but if Romney gets elected the economy will go downhill fast.

      If only Obama would make the argument for a return to FDR-type policies that worked in the last depression, he’d probably win in a landslide. I don’t think the majority of U.S. voters are stupid.

      The European voters are the ones who put the conservatives and charge and have kept them there for decades. What’s so well-informed about that?

      • NW Luna says:

        They’re not that conservative compared to U.S. conservatives. They still have national health care.

      • Seriously says:

        Yeah, honestly, it seems that France might really be heading to the hard right down the road. The National Front seems to be their fastest growing party and Sarkozy really only needed more of those votes to win. He got something like 50% when 80% would have put him over the top, not to mention a fair chunk of Hollande’s voters were National Fronters who were voting tactically to try and displace or at least scare the UMP. It’s still pretty damn scary.

    • dakinikat says:

      There are a lot of top level economists like Stiglitz and Krugman that have been screaming at the top of their voices. I only hope that some folks start tot listen. We will have Bush policy on steroids if Romney gets in. It’s bad enough that Obama hasn’t really jettisoned most of them. Thanks for your kind words.

      • RalphB says:

        Obama needs to jettison those that remain!

      • dakinikat says:

        He’s getting better at jettisoning the damned wars. Too bad he’s not that into civil liberties.

      • NW Luna says:

        Yes, why can’t Obama channel FDR instead of Reagan?

        I always learn something from your posts on the dismal science, Dak. Really helps in making snappy comebacks to the wingnuts when I run into one. Pity they don’t like facts.

  2. RalphB says:

    Great post. It looks like it didn’t take long for other European governments to endorse some kind of “growth” agenda. Who knows about Merkel but others seem to understand that without it they are going to be kicked to the curb by their people. Now, if only that can happen here?

    • dakinikat says:

      I knew from reading your comments last night that you were itching to discuss the European elections!!!

      • RalphB says:

        Before this ends I imagine Merkel will be a sole holdout. It looks like her version of the German position is based less on economics than on sin and redemption. The wastrels overspent and they must be punished.

        The German opposition is ready to go with Hollande it seems.

      • bostonboomer says:

        I hope Merkel goes the way of GW Bush, her former massage therapist.

      • dakinikat says:

        I can only imagine what the German Banks are saying to Merkel. She must be having some very grim days. Just imagine if Germany has to bail out those banks. I don’t think we’re going to do it any more and the rest of Europe has had it with them all.

      • RalphB says:

        They really deserve to fail so, if anyone bails them out, Germany may have to do it alone. Terrible for Germans but the rest of Europe might do better.

  3. RalphB says:

    Paul Krugman on Those Revolting Europeans


    • dakinikat says:

      It’s time for Ireland to join in. Their corrupt banks and politicians did it to them too.

      • RalphB says:

        I’m surprised they haven’t thrown over their shackles already. The difference between Ireland and Iceland are just too stark to ignore!

  4. Fannie says:

    May I say that as a 60ish Californian, I see NO WAY OUT of this sour ass mess. On May 12, thousands of people here will see their unemployment benefits come to an end. And no one is offering solutions, they are not hiring. Those people who made the largest profits don’t feel our pain. We know they are prepping the prisons, here come more young, poor and unemployed inmates, and they are stooping so low as to fetch them from the hospital beds.

    • bostonboomer says:

      California is a lot worse off than many other states, and Brown is pushing the austerity agenda that will make the state much worse off.

      • Fannie says:

        Yup, this is the New Brown, he isn’t nothing like the one who dated Linda Ronstatd, the one I worked with.

      • RalphB says:

        There have been several versions of Brown. The original liberal governor then the more libertarian leaning talk show host followed by a pragmatic mayor of Oakland. Now the more conservative Brown as governor again. I admit to wondering how he would govern now. It seemed unpredictable.

      • bostonboomer says:

        It’s sad.

  5. janey says:

    I’ve lived in France, and for the most part they have a superior kind of life, healthier anyway. The reason the republicans look down their noses at France and some other countries is the fact that they don’t have huge armies. But last time I looked they had universal service, in other words, all their young men have to spend time in their military and be trained. We do not have that.
    Beyond that, I do not understand why if free markets work so well, businesses and corporations and farms, which are businesses, have to have so many tax breaks to help them manage to survive. There is farm subsidies, depreciation tax breaks, low taxes on profits, low taxes on income from stocks, and many others. And apparently businesses cannot survive without these. In the meantime, I have seen many businesses run by people who did not know how to run a business. Just watch Kitchen Nightmares on BBC America and you will see instances of this.

    • dakinikat says:

      We really don’t have free markets. We have mostly oligopolies that game the system and get politicians to create better circumstances for them. They’ve also been fairly successful at getting laws passed that exempt them from responsibility for their own messes and that subsidize them. They also are free from reasonable regulation which is necessary in that kind of market structure.

  6. dakinikat says:

    From Susie Madrak: Krugman: Voters Don’t Care About Deficit Reduction, They Want To See The Economy Getting Better

    • RalphB says:

      Great words of wisdom.

      What this says—a lesson that the Obama team unfortunately failed to learn until very late in the game—is that the economic strategy that works best politically isn’t the strategy that finds approval with focus groups, let alone with the editorial page of The Washington Post; it’s the strategy that actually delivers results. Whoever is sitting in the White House next year will best serve his own political interests by doing the right thing from an economic point of view, which means doing whatever it takes to end the depression we’re in. If expansionary fiscal and monetary policies coupled with debt relief are the way to get this economy moving, then those policies will be politically smart as well as in the national interest.

      • dakinikat says:

        I think I’m going to get that Krugman book. I’m a glutton for the dismal science and the shrill one.

      • bostonboomer says:

        I thought Obama was learning, but he isn’t really drawing a clear distinction between himself and Romney. He could do that if he really pushed for job programs.

      • RalphB says:

        In the speech Obama gave in Ohio on Saturday, one of his main props was a copy of the American Jobs Act which he wanted to pass with no luck due to Congress. I think he knows what to do but don’t know how far he’ll take it.

      • NW Luna says:

        “the Obama team unfortunately failed to learn until late in the game…”

        C’mon, say it, Paul. It’s Obama. He’s the one responsible for the Obama team.

        I agree with BB that Obama still does not get it.

      • RalphB says:

        Your both right to this point.

  7. Fannie says:

    The Biggie BB is the that Transportation Jobs Bill that thge republican house won’t past. They keep insisting for every job created, they have got cut spending………what kind of crap is that?

    The ones who have lost some good jobs are the 600 thousand public employees who were laid off because of republican cuts, those are the teachers, the fire department workers, and the police officers……………

    You are right, he’s got to lay it out, and screw the republicans.

  8. jawbone says:

    A German sounding guy from The Globalist appearing on NewsHour tonight said that democracies no longer are accountable only to their citizens; indeed, the “global financial market” is the final arbiter on what sovereign nations may or may not do.

    Whoa, there, Big Banksters –(or hedgefundies, who, per an article I read earlier, now have the entire Euro Zone in their sights to short and make money on by bringing down everyone, from Germany on down)– if anything might focus governments on the actual need to increase taxes on the UberWealthy, the fact that they now think they’re bigger than the biggest economies might do it. If the UberWealthy have more money than they can conceivably manage, even know what to do with, so much that they regularly take extremely risky bets because they can afford to lose oodles and not even notice, having to pay more to their governments, leaving them with a bit less to squander and a realization they need to husband their resources, then, just then, government might once again be big enough to handle Big Banksters and their predatory financial games.

    As a bonus to us in the lower quintiles, the wealthy would have somewhat less with which to buy politicians and thus control over governments and their nations. He who pays the piper calls the tune.

    But until that happens? According to this German sounding guy, Hollande will be facing heavy disapproval should he not meet the banksters’ demands.

    Brief Bitch about NewsHours’ Website: I would gladly give you the guy’s name and I could have done so back in the days before NewsHour so nicely “improved” its web site. Back in the day, even before the day’s show was in progress. the web site would have a list of the guests appearing per segment along with a brief descriptionof the topic. When I saw something which seemed important I could immediately link to it.

    No longer. Now I don’t know when they get such info up, but it’s sometime the next day or very late at night. And I usually forget to go back. And just finding things is more difficult. Grrrr.

    What an “improvement.”