What’s so hard to understand about the word Contractionary?
Posted: December 10, 2011 Filed under: Bailout Blues, Banksters, Economy, financial institutions | Tags: Eurozone, macroeocnomics, Paul Krugman 17 Comments
I just read an excellent article at VOXEU called “A summit to the Death” by Kevin O’Rourke. It’s full of common sense economic analysis about the state of the EU that reminds me of how rare common sense can be. While the analysis looks at he EU, it could well apply to the US as well. There seems to be some disease in political bodies these days that cannot grasp the concept of contractionary policy as contractionary.
There’s also this scramble to save financial institutions at all costs while doing nothing to prevent recurrence of bad practices and solving the fall out anywhere outside a bank balance sheet. To a certain extent, the EU crisis comes from the inability of many countries to think of policy in terms of something other than currency devaluation as a way of making their workers and goods appear cheap to the rest of the world. In this scenario, a country can goose some of its business activities at the expense of some of its businesses and its citizens and not get caught by any one but those of us that watch those sort of things. That long run game of devaluing US workers has caught up with us here.
One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.
A second, related lesson is that it is difficult to cut nominal wages, and that they are certainly not flexible enough to eliminate unemployment. That is true even in a country as flexible, small, and open as Ireland, where unemployment increased last month to 14.5%, emigration notwithstanding, and where tax revenues in November ran 1.6% below target as a result. If the nineteenth-century “internal devaluation” strategy to promote growth by cutting domestic wages and prices is proving so difficult in Ireland, how does the EU expect it to work across the entire eurozone periphery?
The world nowadays looks very much like the theoretical world that economists have traditionally used to examine the costs and benefits of monetary unions. The eurozone members’ loss of ability to devalue their exchange rates is a major cost. Governments’ efforts to promote wage cuts, or to engineer them by driving their countries into recession, cannot substitute for exchange-rate devaluation. Placing the entire burden of adjustment on deficit countries is a recipe for disaster.
In order to protect financial markets, countries like the UK and the US have been willing to prop up poorly performing financial institutions at an extremely high cost while further driving the nominal wages of their workers to lower and lower levels through currency debasement. Then, after slashing spending, they wonder why they’re economies don’t expand. It seems like some of the very easiest lessons of Macro 101 weren’t absorbed by a number of world leaders today. That vehicle of robbing Peter to prop up Paul and a few exporters isn’t available to countries in a currency union unless the Central Bank wants to do it for all.
O’Rourke’s analysis led Paul Krugman to rightly make this observation.
Maybe it was always thus, but the relentless wrong-headedness of the Europeans, their insistence on seeing their crisis as something it isn’t, and responding with actions that deepen the real crisis, has been a wonder to behold. In the 1930s policy makers had the excuse of ignorance; there was nobody to explain what was happening. Now, their actions amount to a willful disregard of Econ 101.
Let me provide an interesting bit of perspective. In 2007, Spain ran a budget surplus. That actually was its third budget surplus in row. At the time, its growth had been forecast to decline but ot was slammed by the global financial crisis. Spain is now on the list of problem countries–the S of the PIIGS–because it was trying to deal with 30 years of budget deficits to get in line with the EU Criteria. Balanced budgets are the proscribed way to handle an economy that is operating where it should be operating. Spain’s is having problems because financial institutions all over the world gambled and lost. Their economic activity declined, their tax receipts went down, and their obligations to the unemployed went up. So, as would be expected, their deficits widened. Now, the banks that caused the huge global crisis are getting full court sympathy and Spain is being blamed for threatening the status of the union.
We need a New Brain Trust
Posted: August 13, 2009 Filed under: Global Financial Crisis, president teleprompter jesus, Surreality, Team Obama, The Great Recession, U.S. Economy | Tags: Angela Merkel, Christine Lagarde, Eurozone, French Economy, German economy, Nicolas Sarkozy Comments Off on We need a New Brain TrustWhile the U.S. economy sputters, France and Germany appear to have exited their recessions and returned to modest growth during the spring. There’s been a distinctly different approach to macroeconomic policy taken by Chancellor Angela Merkel and President Nicolas Sarkozy and their respective finance ministers that deserve elucidation.
The French and German economies both grew by 0.3% between April and June, bringing to an end year-long recessions in Europe’s largest economies.
Stronger exports and consumer spending, as well as government stimulus packages, contributed to the growth.
Germany is a manufacturer and exporter. Yes, that’s right. Germany has trade unions, good vacation packages,
excellent schools, universal health care, lots of solar power and tough environmental regulations and they still have a manufacturing economy and they export. Their form of government is basically a type of democratic socialism. All the things we are taught to view with suspicion. Still, Germany manages to manufacture things and export to China the country to whom the U.S. has practically sold their collective soul so we can massively import junk on a rapidly decreasing credit line.
The latest figures showed German exports had grown at their fastest pace for nearly three years at 7%, with particularly strong growth in demand from rapidly-growing economies such as China.
The country’s Federal Statistics Office said that household and government expenditure had also boosted growth.
It added that imports had declined “far more sharply than exports, which had a positive effect on GDP growth”.
“These [GDP] figures should encourage us,” said Germany’s Economy Minister Karl-Theodor zu Guttenberg. “They show that the strongest decline in economic performance likely lies behind us.”
It’s the same story with France. Household consumption and export markets are improving. I don’t know if you’ve ever listened to Finance Minister Christine Lagarde but she’s undoubtedly one of the best in the world. Compare her to our Secretary of Treasury Timothy Geithner and you’ll see who comes up quite short. First, she’s a noted anti trust lawyer as compared to a noted monopoly enabler.
Ms Lagarde said that consumer spending and strong exports had helped to pull France out of recession.
“What we see is that consumption is holding up,” she said.
Official figures showed that household consumption rose by 0.4% in the second quarter.
She said government incentive schemes for trading in old cars, together with falling prices, were helping consumers.
Foreign trade contributed 0.9% to the GDP figure – a “very strong impact”, said Ms Lagarde.
We are daily fed this propaganda that other countries come up short when compared to the United States and our economic machine. We are told that countries with high union participation, with universal health care, with high standards for the work environment and tough regulations for business and standards for the environment come up short when compared to the U.S. These countries both undertook solid fiscal stimulus. Here is some information on the French package passed in February. The Obama stimulus package passed during February also.
France’s economic stimulus package encompasses a three-pronged plan: €11 billion ($14.5 billion) each to go to direct state investment and to inject capital into private-sector enterprises, plus €4 billion ($5.24 billion) for state-run companies to be applied toward improvements for the national postal service, energy supplies and the rail network. Of that amount, some €1.3 billion ($1.7 billion) is to go into refurbishment of higher educational institutions, prisons, monuments and court.
Here’s some information on the German package also passed in February.
Germany has approved a 50bn euro ($63bn, £44bn) stimulus plan aimed at boosting Europe’s largest economy.
The plan was approved by the upper house of parliament, which represents Germany’s 16 state governments.
It includes infrastructure investments, tax relief, reductions in health care contributions and money for families with children.
The package follows an earlier 23 bn-euro plan that was criticised for being too cautious.






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