Austerity On The Run
I wanted to flag this before it became too much Old News. Andrew Sullivan, still a self-described conservative and a tireless deficit hawk, has looked to the events in Europe and concluded that austerity — at least for the time being and in a democratic context — simply doesn’t work:
I don’t like this conclusion. I start from the belief that government should run surpluses in good times so that they can have some fiscal lee-way for stimulus in bad times. Readers know I deeply oppose government debt outside of structural investment, i.e. unsustainable entitlements and unsustainable empire. But if premature or excessive austerity actually deepens debt, as seems to be happening in Europe, then the equation changes.
I guess what I’m saying is that if this US election is fought around amnesiac discontent at an incumbent during tough economic times, then Obama will lose. Which is why Romney’s strategy appears to be entirely that argument. But if the choice is between drastic European-style austerity on Romney lines, with the burden carried primarily by the poor and working poor, and Obama’s emphasis on more long-term structural cost-cutting, infrastructure investment and more revenue from the rich now, then the equation shifts.
I may be wrong, and it doesn’t thrill me, but my bet is that the West is moving leftwards for pragmatic reasons. And that America will not be immune. Pendulums swing, and the long free market period of 1979 – 2007 is giving way to a more government-based management of the unintended consequences of the right’s initial success and subsequent over-reach.
Providing some hard news proof of Sullivan’s theory is a new story in the New York Times about Germany’s PM, Angela Merkel. More than any other individual, Merkel is the face of austerity today; and as the Times notes, after more or less three years of calling the eurozone’s shots, it’s increasingly looking like she soon may find herself the odd-woman-out at EU sovereign pow-wows:
With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European table has become much less comfortable, as a reckoning with Germany’s insistence on lock-step austerity appears to have begun.
“The formula is not working, and everyone is now talking about whether austerity is the only solution,” said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. “Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing.”
A German-inspired austerity regimen agreed to just last month as the long-term solution to Europe’s sovereign debt crisis has come under increasing strain from the growing pressures of slowing economies, gyrating financial markets and a series of electoral setbacks.
Spain officially slipped back into recession for the second time in three years on Monday, after following the German remedy of deep retrenchment in public outlays, joining Italy, Belgium, the Netherlands and the Czech Republic. In the Netherlands, Prime Minister Mark Rutte handed his resignation to Queen Beatrix on Monday after his government failed to pass new austerity measures over the weekend.
The political upheaval drove stock markets on the Continent sharply lower, with Germany’s DAX index finishing the day down 3.4 percent. The sell-off in Europe dragged American indexes down around 1 percent. A survey of European purchasing managers showed an unexpected plunge in confidence this month.
The Netherlands, a staunch supporter of the German position, became the latest European country forced into early elections by the European crisis, just one day after the first round of presidential voting in France raised the possibility that the incumbent, Nicolas Sarkozy, would be unseated by his Socialist challenger, François Hollande, in a runoff election.
As the Times goes on to note, this doesn’t mean that austerity, like war, is over. But it does mean that a strain of conventional wisdom that has had a vice-like grip on Western elites for decades may finally be reaching its end. It’s little consolation to the more than 50% of Spanish youth searching for work; but it’s a decent harbinger for the future. And for Europe today, that’s no small thing.
Of course, it doesn’t work in a democratic context. Much like many problems along this line, the solution will always be to kick the can down the road. Admittedly, a lot of the austerity measures that Berlin was proposing were more a political sop to Germans who are getting real tired of being one of only two horses pulling the EU cart. (The other, France, is also giving Sarkozy the stink-eye for saying things like “We can’t put the entire country on vacation for the month of August.”)
I imagine, if these austerity measures are swept aside, Merkel will have to abandon the tightrope she’s walking or else get swept aside. Regardless of what happens to her, Germany will jump ship out of the EU.
At this point, I can’t blame them. Going from the third largest world economy to being the one expected to bail the rest of the EU out gets tiring after a while.Report
That’s an awfully charitable way of looking at the Germans. There are a number of issues with the Eurozone (chief among them the fact that it seems federalizing the monetary policy without a fiscal counterweight seems to be a pretty large failure), but in essence the issue boils down to “What’s good for Germany ain’t good for Spain”. Or Greece, or Italy.
And in the long run, since Germany’s such an export nation, what’s bad for Greece, Spain, and Italy is bad for Germany.
We got around that here, in the US, because of the way the federal government moves money around (especially in recessions). Good times in California contribute more money to federal coffers, which means that Georgia’s drop in federal reciepts due to bad times doesn’t impede, say…the highway fund. Or Social Security.
Monetary police for the Euro is benefitting Germany, but strangling other countries — including ones whose houses were in quite good fiscal shape until quite recently. Not to say there aren’t structural problems with many countries (I would include our lovely US of A in that as well), but certainly a recession straightjacketed by slashed government spending AND counter-productive monetary policy is not going to make things better.Report
I don’t see how it is a charitable statement to say that Merkel & Co. are proposing austerity measures for the rest of the EU to placate the German populace. The only reason monetary policy favors Germany right now is because, if they didn’t tilt it that way, Germany would have already jumped ship. When that happens, the EU has about as much chance of hanging together as the League of Nations did when the U.S. refused to sign on.
And, honestly, most of them weren’t in such great shape even before joining the EU. In the case of nations like Greece, they were a basket case before the EU. One of the reasons that was specificly given for joining the EU was to give them “breathing room to fix their economy” which we now know was double-speak for “This allows us to kick the can down the road”. France, under Chirac, may have also been one of the “strong” economies but, even then, it was having instabilities.Report
Pyre, what you’re leaving out of this narrative is the massive benefits that Germany got from the EU. They come in two forms:
First: Germany was able to join a currency union with the rest of Europe. This made their currency artificially less expensive and thus makes German manufacturing much more competitive than it otherwise would be.
Second: Germany within the EU gained essentially free access to all the EU member states markets. This essentially meant that the other EU states tacitly agreed to outsource their manufacturing to Germany. This was huge for German jobs.
The entire EU gig was a mutually beneficial deal. The EU periphery got to borrow like Germans. The Germans got to have economic growth like poor peripheral EU states. It was win-win until the music stopped. The narrative of poor benighted worker bee Germans being abused by the rest of the EU is an intuitively appealing one but it is only half of the picture. What’s essentially happening is Germany has to decide if it wishes to continue the pleasant state of affairs it has enjoyed since the EU and the unified market started. If they do then they’re going to have to pay for it (in the form of bailouts and inflation of the Euro). If they don’t then the party is over and they’re going to have to face the potential of a hyper-strong German currency and the specter of trade barriers rising in what has been essentially their own private domestic European market.Report
Fair enough but the fact of the matter is that the “poor benighted worker bee” Germans had very little say in joining the EU in the first place. That’s a political factor. There’s also the matter of nostalgia for “the way things were”. Americans aren’t the only ones who do that in their politics by ignoring the bad and amplifying the good. That’s another political factor.
As for trade barriers……That’s like saying China is worried about the U.S. enacting trade barriers. Sure, it could happen. Sure, it would hurt. However, that narrative is also one-sided when you think of both the likely economic barriers that Germany would put up in turn as well as Germany’s ability to sell to the rest of the world compared to the rest of the EU. There’s also the matter that, if the other nations did that, Germany would most likely decide, instead of withdrawing under the provisions of the Lisbon Treaty, to take the more radical and immediate approach of unilateral withdrawal. EU Trade barriers are largely an empty bluff.Report
You know, the “trade barriers” argument reminds me of another argument I had when someone proposed the notion of Greece realizing they’re screwed anyway and just giving everyone the finger on their loans. The only difference was that I was on the other end of the argument and trying to lay out “here is how the EU will react and that would be bad for Greece so they should stay.”.
The problem with keeping Greece and Germany in the union is that one is largely screwed regardless and the other would be able to weather any consequences well enough to come out on top anyway.Report
The basic fundamental point is simply that the EU has enormous and fundamental benefits to Germany; any one sided narrative is facile. The Germans have benefitted as much (if not more) than the rest of the EU member states from the trade union. They would likely suffer quite a lot from dissolution of that union. The Germans, mind, are very aware of this; you’ll find fewer people more enthusiastic about the EU than the Germans. That is why the idea of the Germans jumping ship out of the EU is very farfetched unless they’re faced with truly enormous transfer payment requirements.Report
Do they? If so, why the threats of trade barriers? Why is it that, when those stories about German banks allegedly printing out marks came around last year, the Euro sank like a rock? If the possibility of a German withdrawal is so farfetched, then why wouldn’t the rest of Europe tell them to take their austerity measures and bugger off?
Or is that statement more along the lines of Cameron refusing to hold a referendum on U.K. withdrawal from the EU where the obstensible reason given is that the previous agreements reflect the true will of the people (and the actual reason is probably that Cameron is afraid of what the actual outcome of such a referendum would be)?
I’m not saying that the EU has had benefits for Germany but it’s has also had a lot of downsides both real and perceived to those that you referred to as “the worker bees”. Are you really that sure that, if it came down to a popular referendum over whether to withdraw or not, the vote would come back in the EU’s favor?Report
“I’m not saying that the EU hasn’t had benefits for Germany”
This place still needs an edit button.Report
I should clarify this some to avoid the notion that I’m just putting out “are they”s?
To use an American example, Rick Perry actually was very popular with female voters while he was in the race. One could argue that this doesn’t make sense with his voting/legislative record but that doesn’t change things about his charisma with women voters while he was in the race.
You’re arguing that “you’ll find fewer people more enthusiastic about the EU than the Germans”. Maybe that’s true at the governmental level. One could even argue that their industry leaders would say the same. Are you sure that’s true of the common citizen? Are you so sure that the average Dieter is saying “Well, leaving the EU would erect trade barriers and the EU has brought a number of very tangible benefits to our industry that might disappear if we left. Also, if we left, the Euro would crash and then Greece would happily repay their debts with the now worthless paper against our strong Mark.”
or
is it possible that he’s saying “We’re the only ones pulling the wagon and we get villified for it. The hell with all of them. Let’s go back to the good old days.”?Report
The German polity is an amalgam of their political and industrial elites and their naturally populist populace. The two groups have to talk to each other and they do. Certainly pro-EU sentiments are higher for the elites than the masses, this is to be expected. But anyone who thinks that a German departure from the EU is going to lavish benefits on German workers is smoking something. The cost of their goods to their consumers will massively skyrocket (even assuming not a single trade barrier and that’s one hell of a big assumption considering how bad the blood between Germany and the rest of the zone would be if they left). That equates to significant reorienting of purchasing. The germans aren’t the only game in town. If german goods suddenly have to be bought with Marks that sell one to a hundred for Euros then the Europeans will buy Chinese, American or anything else and the Germans will have one hell of a recession.Report
Germany, home of the grognards. The first, because the Germans? They do this shit for fun (that is, wargames and extremely mathematical board games).
The russians living in Germany are probably a different story…Report
Do they? If so, why the threats of trade barriers? Why is it that, when those stories about German banks allegedly printing out marks came around last year, the Euro sank like a rock? If the possibility of a German withdrawal is so farfetched, then why wouldn’t the rest of Europe tell them to take their austerity measures and bugger off?
Umm because people were calculating what the value of the Euro would be minus the value of the German production in it? This is like currency 101? As for why the Europeans don’t tell the Germans to bugger off, well they haven’t… yet… but we are witnessing right now the collapse of the German led austerity side in the EU. There may very well come a point where the Euros tell the Germans to “bugger off” at which point the Germans will have to decide whether they want low unemployment with them within the EU with higher transfer payments and or inflation or whether they want much much higher unemployment on the outside with no transfer payments and full control of their currency.
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It’s a charitable statement because the German economy of the 90s (remember those days? The 90s, so far away) was itself not doing particularly well, especially on an exchange rate basis. Unification was all very well, but German firms suffered tremendous structural disadvantages viz Europe and the rest of the world because of the strength of the mark.
While the German populace loves to go on about “responsibility”, the reality is that European integration essentially removed one of the competitive disadvantages of the German industrial sector: a high priced currency. When it was put on level pegging with the rest of Europe, it was suddenly substantially more competitive and could crowd out other European economies because suddenly the barriers to entry (with regard to human capital and capital investment in manufacturing) suddenly became much larger.
Moreover, until the Lehman Shock (I love this term for the 2008 collapse, by the way, I don’t know why no one in the US uses it) the average deficit in the entire Eurozone was less than 1% of GDP. Granted, some of this was possible because there was so much capital sloshing around the world system and feeding into real estate bubbles (most notably in Spain and Portugal) but in general the Eurozone wasn’t doing too badly.
The sovereign debt crisis was and is fueled by what is primarily an investor panic. Much of the economic fundamentals of the countries haven’t changed that much. What changed most dramatically was that there was a round of austerity measures demanded by Germany to sooth fears of EU investors taking hair cuts on investments, and that led to economic slowdowns as fiscal contraction took hold. This is a self-inflicted wound. A more competently managed ECB (with perhaps slightly more power) could and would have arrested this process much, much more quickly.
I have a feeling that in about 20 years, we’ll see a European monetarist narrative emerge for a strong European central bank.Report
That is not a charitable statement because Germany’s economy, before the formation with the EU, was the third largest economy in the world even with the disadvantages that came along with a strong Mark. Yeah, they had their issues (East Germany reintegrating was a lot more problematic that people thought it would be) but, make no mistake, they would have still gone on strong with or without the EU.
But, mostly, it isn’t a charitable statement because my original statement paints the picture of Merkel and Co. throwing the rest of the EU to the wolves in order to appease German voters. I still don’t see how my original post is a charitable way of looking at the Germans.Report
Being world’s x-est economy doesn’t really tell you as much about that economy as you’d think. Japan was world’s largest economy for most of the 80s, all of the 90s and all of the oughts. No one (except for Eamon Fingleton) would say it was “doing just fine”.
Germany’s growth rate in the 90s after the immediate post-reunification boom was a mess. Its external competitiveness fell off a cliff as wages increased domestically and the mark continued to appreciate. Macroeconomic indicators for Germany also showed substantial decreases in FDI, leading to the general belief that it was simply not up to competing with the rest of the world.
Basically what let Germany stay 3rd for as long as it did was the massive improvements in external competitiveness that came with European integration. Even then it had to suffer because of some terrible inefficiencies in its economy which are rooted in its unique labor force structure.
I’d bet you that German export firms would move jobs quickly out of Germany (probably to Poland, Austria, and possibly Slovenia) if the country left the Euro. Any new mark would likely gain secondary reserve currency status quickly and become an investment haven, leading to rapid appreciation much like the yen saw in 2009 – 2012. If the Japanese case is any indication that will lead to off-shoring of manufacturing capacity….which in turn of course hurts domestic jobs growth.Report
Actually, Japan was never the world’s largest. It was the second largest through the 80s, 90s and half of the oughts (being overtaken by China in the latter oughts).
Perhaps they would leave although that argument seems to be projecting a lot of U.S. economic woes onto other countries. On the other hand, since West Germany (and later Germany) has had a healthy GDP that has only been surpassed by Japan and the U.S. up until China’s expansion, I would argue that argument is not a sure thing.Report
Err that should’ve said second largest. I could’ve sworn that’s what I wrote.Report
Certainly the kind of austerity that, say, Paul Ryan has been espousing is definitely on the run in Europe and especially in Britain and Ireland where they appear to be descending deep deep deep into an austerity sink. Austerity of course impedes economic growth which leads to lower government revenues which in turn leads to bigger budget deficits which leads to more austerity which leads to more economic impairment; a vicious cycle.
But one thing that should be emphasized is that while austerity right now of the kind that Europe has done is suffering considerable discrediting that doesn’t mean that budgetary discipline in general is discredited. The ideal solution of course is a mixed method; deficit spending in the short term coupled with reforms that promise to bring spending down in the long term. Entitlement reform and tax reform in the US, for instance, if done right would be just what the doctor ordered by allowing deficit spending in the near future while reassuring lenders and bond markets that the country isn’t going to descend down the Greek.
Alas the politics end a painful sword of Damocles issue as well. Squirmy politicians being what they are; the near term deficit spending comes easy but the hard decisions on long term reforms are very hard to get done. On top of that incumbent politicians in bad economies are already terrified of being fired (and bad economies do lead to blind anti-incumbent fever) which makes them even more risk averse. Politically of course the Canadian method offers the best means of proceeding: classic Keynes; cut the spending and raise taxes while the economy is on a strong rebound. Unfortunately politicians being the squirmy fellows they are the historical example has been that tax cutters and spending hikers will outbid deficit hawks in good times and the can gets kicked again.Report
Look, when even the Netherlands (and the Dutch are careful with their money) is talking about going over the 3% of GDP limit on deficit spending because austerity is destroying their economic growth, we’re at a point where the German led austerity regime’s not gonna hold up under pressure for much longer.
Greece is an outlier, in so far that the country itself was criminally mismanaged. The other of the PIIGS are being punished in ways that are more likely to continue dragging down the European market than prop it back up. It’s worth noting that Spain for example had a much better fiscal house prior to 2008 than Germany did in terms of public expenditures.
Of course what makes this difficult from Merkel’s point of view is that a depressed Euro keeps fueling German competitiveness abroad, particularly vis-a-vis their East Asian rivals. (Germany in particular is reaping the benefits of a weak euro and extremely strong yen)
Now granted, maybe the German people are willing to drag Europe into calamity yet again, but this goes beyond fiscal issues and into macroeconomic policy writ large.
And God help us if the UK continues its 0.1% growth and continued inability to fix its budget problems in combination. Cameron’s fixing for a fall.Report
Oh agreed heartily. There’s gonna be a Lid Dem and Tory blood bath if the UK keeps struggling.
Germany really is in an interesting position. The more lousy Europe gets the better it is for Germany economically unless they either are asked to support significant bailouts or if the Eurozone collapses. If the former happens they essentially are handed the bill for the massive free market they’ve been enjoying all this time. If the latter happens then they’ll loose their free maket and there’s could be a massive wave of unemployment in Germany. So the cold blooded German goal would be to provide the minimum amount of bailouts and allow the minimum amount of inflation necessary to keep the Eurozone intact.
And yes, Greece was a massive outlier and personally I have very little sympathy for them. My heart bleeds for Ireland, on the other hand, they didn’t deserve what they got. If I were the Irish polity there’d be bankers and politicians hanging by their toes from every lamp post in Dublin.Report
Tories are likely to do quite a bit better than the Lib Dems. The Liberal Democrats as a party are finished. They really did sell their souls to the devil for a stake in government and they’re going to reap a massive blood bath in the next election. Maybe that’s for the best.
Labour really needs to stop being Tory-lite. Maybe the demise of the Lib Dems will force the centre-left to play within an existing structure.Report
I don’t follow British politics closely but that does sound likely. Lord knows Labor could use an infusion of Lib-Dem brains.Report
And God help us if the UK continues its 0.1% growth and continued inability to fix its budget problems in combination.
Growth?
http://www.bbc.co.uk/news/business-17836624Report
Okay, point taken. Double dip recession.
Fiscal austerity is the answer!…wait.Report
This is a couple of months old, but while Merkel may be losing allies abroad, she is very popular at home. And those are the people that count, for Merkel (and those are the people that should).
And if she’s the only one with money, guess what? She gets to call the tune. Everyone else can do whatever they want as the result of *their* elections (as they should), but they can’t still come crying to Germany for money when they already reneged on a deal younger than some of the leftovers in my refrigerator.Report
I’m sure all those euros the Germans have stocked away will provide very warm kindling when the rest of the market collapses, leaving no one to buy their goods…but hey, short term interests and all.Report
If the euro collapses, everyone’s holdings in Germany may actually rise in value (as the convertability reverts to the traditionally strong Deutchmark, vice the mix bag of everyone mushed together). And there’s still plenty a princeling in China looking for his Mercedes.Report
The princeling will buy a Masserati or Lambo instead when that price of the Mercedes shoots up 4x because Germany’s back on the Mark that’s trading at $0.50 to the mark. Given that even the SNB ordered a Euro peg to the Franc, it’s not likely that the new mark would be cheap enough to keep German goods in circulation unless Germany decides to do something absurd like print gobs and gobs of cash at the same time and set domestic inflation to 11.Report
I tried using this reasoning with the bank. I told them that imposing austerity measures would severely impact my household economic growth, and that if that happened then they’d never get their money back. They said that might be the case but they still weren’t willing to raise the limit on any of my three maxed-out credit cards.Report
+ 1Report
Countries aren’t households and households aren’t countries.Report
Yes, if I tried to claim that the bank should let me refinance my house to pay for a kitchen renovation even though I owe three times what the place is worth–and that I wouldn’t even consider cutting off my premium-level cable and cell phone service, or not buy a new car this year–I’d be laughed out the front door. But apparently it’s okay for the government to do that, and suggesting that they shouldn’t is being an Austerity Hawk.Report
DD,
no, sorry, redo the math.
You now owe 1x of what your whole family takes in in a year (granted, a lot of that goes out to other things that are not “your savings…”). You owe roughly 5% of what it’s worth, and are trying to take out a loan for another 1%.
Btw, what are these cable and phone service that you wanna cut? Remember, cutting the US Mail is a matter of national security…Report
Well if you look at the comparative growth charts the contrast is brutal. The English growth was recovering and then falls off a cliff when the austerity government kicks in. In contrast the Americans, deadlocked on autopilot except for stimulus, unemployment extensions and tax cut extensions, have significantly better growth.
But the household comparison really just doesn’t work even metaphorically. The household income for instance is not generally much effected by the household spending.Report
It’s actually more an acknowledgement that we have built a financial cage in which there is no longer any way to limit government growth/spending without massive consequences.
Meh. Works for me. My current job is pretty much a product of such fiscal policies and, being in a largely military family, it’s worked for my family both in the past and the present.Report
Is it that you don’t understand that a country isn’t a household — it’s not even a businesss (which can, and often do go into further debt at times to increase their long-term prospects. Not as much in these two-quarters and out days of short term profits, but occasionally) — or that you understand and just ignore it because it gives you a pithy soundbite you hope fools the masses?
I mean i get your idealogy and all is probably helped by the smallest possible government spending every, but given the way austerity measures are currently going, you’re actually screwing over your idealogy.
I mean, let’s face it — Europe as a whole is trying that “less government spending/live within your means” thing you’re so keen on, and it’s making it worse. How do you think that’s gonna play in Peoria, long term?
You think when times are better people are gonna look around and say “you know what we need? Austerity! Just like they tried during Depression 2.0! Let’s give those ‘The government is a household’ guys another shot! It worked so poorly last time, it has to work now!”
Penny wise, pound foolish — and all for a cheap rhetorical point everyone here — including you — realizes is BS?Report
Citing myDD, it’s making it worse, usign the Heritage Foundation’s Own Numbers.Report
I just don’t get it. I mean, I get the connection in that people have differing beliefs on the proper size, role, and influence of government.
I get Density there is of the “much smaller than what we have now” side. I also get there have been a whole lot of plans and approaches to make the current government more the size Density there wants — ranging from starving the beast (“Let’s make the debt so bad they’ll have to shrink government!”. That worked so well. Now you’ve made spending cuts AND tax increases about as equally popular. Good job. At least when people grasped they had to pay for crap they were a little more careful. Now it’s all free, because tax cuts = more revenue forever!) to, you know, “gotta live within our means, it’s a recession so our means are tiny, let’s shrink this puppy down and not let it grow after” sorta approach.
What I don’t get is trying to hitch your horse to a broken wagon. Austerity, as shown by Europe, is clearly the absolute wrong response at the moment. And since nothing in the “smaller government” approach really requires austerity in general — it’s about what you think the proper size and role of government should be — you’d think you’d want to distance yourself as far as possible, to avoid guilt by association.
Smaller government != massive recession. But it’s like you’re trying to make the case that they go together, at least to the masses. “Let’s get austere! Let’s watch the economy die! One must cause the other!”Report
Okay, big post deleted.
A: anyone who’s ever taken out a student loan will tell you that households most certainly will go into debt to improve their long-term prospects. But–again–if you have too much debt to start with then the bank won’t let you have any more. Why is it different for the organization that runs literally everything in the country? Why do they get to be less responsible than us?
B: You say that austerity kills. Then you say that “smaller government” isn’t austerity. If smaller government isn’t the result of austerity policy than what is?Report
deflation.
*runs*Report
Austerity kills in a recession. (No, not all recessions. But in one that has low inflation — barely above deflation — and high unemployment? Yes.)
Austerity is a very bad decision for a government facing a deep and prolonged recession, lack of consumer spending, high unemployment, and low inflation. Doubly so when monetary policy is out of the picture — like it is here and in Europe. Here because we’re up against the lower bound. So badly so that the Fed has resorted to trying to screw with the long-term rates to get anything going, since other than the initial bailouts and too-small-by-half stimulus (which was about enough to cancel out the states contractionary moves as their tax receipts plummeted).
And given the current borrowing rates on T-bills, the US government borrowing money and plowing it into all sorts of things that need to be done and will eventually be done — like, say, replacing century old water mains and repairing roads, to name two — is the responsible thing to do. After all, the work needs to be done, the cost of borrowing is practically nothing, and it will provide work — and thus increase revenue.
After all, if the roof on my house is wearing out and will need to be replaced soon — should I not take advantage of low interest rates to have it fixed now? Before it leaks and causes even more damage to be repaired?Report
“if the roof on my house is wearing out and will need to be replaced soon — should I not take advantage of low interest rates to have it fixed now? Before it leaks and causes even more damage to be repaired?”
Sure.
Should you also buy a new car because It’s A New Year, Time For A New Car? And buy a new cell phone because last year’s model is outdated now? And replace the rugs in your house to keep its value up?Report
So to answer my original curiousity — this is entirely about idealogy with you, and nothing else? Smaller govenment = better, austerity = less government spending, ergo austerity = good?
It’s about the only way I can make sense of your statement. (Although I do note — replacing carpet and appliances is a frequent investment for people looking to sell their homes).
It seems relatively straightforward to me. Both Europe and America are suffering from ridiculously low inflation and high unemployment across-the-board. Unlike many European countries — straightjacketed by an ill-fitting Euro policy — American interest rates are, effectively, zero.
Unless you’re of the mind that government spending does not, ever, boost the economy the case for borrowing now to stimulate the economy seems quite simple. Being a long-term/two-birds with one stone sort of guy, I’d prefer borrowing be done for those types of things that would have to be done anyways. (You know, replacing water systems, bridges, roads, dams, etc — stuff that will get done and paid for by government anyways).
But then, I’m pragmatic about that sort of thing. I’m not welded to the belief that government must be one size or the other, or that one response or another is the “perfect answer” to all problems.
I’ve just seen what austerity in this recession has done to Europe — and to the US states that have contracted the most. At least the 50 states had UI and a handful of other federal programs to counteract that to some extent.Report
“replacing carpet and appliances is a frequent investment for people looking to sell their homes”
Except I’m not planning to sell my home any time soon, if ever. Is it “ideaology” to suggest that maybe I don’t need to replace the carpet every single year?
“Both Europe and America are suffering from ridiculously low inflation and high unemployment across-the-board.”
So to solve that problem we hire create the Government Department Of Ditch-Digging and the Government Department Of Hole-Filling and have each of them hire one million men to chase each other across the country. PROBLEM. SOLVED.
“You know, replacing water systems, bridges, roads, dams, etc — stuff that will get done and paid for by government anyways”
Except, as any True Scotsman would say, the kind of people who want to see reduced spending rather than increased taxes don’t want those things to be cancelled. What they want is to see the discussion move beyond the same old Excluded Middle fallacy they’ve been presented with since forever. “Raise taxes or cut services! Those are the ONLY TWO OPTIONS!” Couldn’t we means-test retirement benefits? “NO THAT IS TOTALLY IMPOSSIBLE.”Report
Zero inflation plays REALLY FUCKING WELL to the republican base. Who are OLD SAVERS. No, It will break the economy — capitalism can’t function without growth. But it’s a popular thing to say…Report
The example is probably more like:
Spain was offered an ARM at low rates during good times. It thought it understood the terms when it took the loan, and was paying off its loan very well (with its nice 1% surplus) each year. And then suddenly the banks get hit with absurdly huge losses and they get into a panic and DEMAND that Spain suddenly increase its interest payments after an adjustment.
Spain responds by cutting back on essential spending in its household, including unfortunately the day care expenses that were allowing a member of the household to work rather than stay home watching the kids. This gone the overall household income declines, but the bank screams it needs even more payments and jacks up the rates again and doesn’t allow Spain to take out a line of credit to cover itself while it gets things back in order.
If you want a clumsy analogy this one’s actually closer to reality.
Yeah some people lied outrageously to get their loans, but most people who got mortgages didn’t.
Same goes for the countries in the EU. Greece was criminal. The rest of the PIIGS? Not so much. And now even the Netherlands (a model of fiscal rectitude) is crying foul.Report
…so, wait, is the problem caused by austerity measures, or is the problem caused by banks raising interest rates?Report
Austerity measures were generally put in place as a sop to skittish investors who wanted assurances of “fiscal responsibility” or whatever nonsense word they wanted to use. A lack of confidence in a country’s long-term public expenditure outlook is what generally causes sovereign debt crises in countries with less than a 100% debt to GDP ratio when it happens.Report
The problem is exacerbated by poorly timed and structured austerity in the midst of a recession. That was the Great Recessions problem too (along with terrible monetary policy) but back then they at least could claim not to know any better.Report
Governments aren’t households. When a household borrows money and spends it, the spending has no impact one way or another on the costs of the borrowing. The lender can treat the borrower’s income as independent of whether they choose to lend the money or not. Because government spending and government borrowing are financed by taxes, and government spending and government borrowing both impact the present and future tax take, its not possible to treat a government’s income as independent from its borrowing. Especially when interest rates are very low, when the government borrows and spends more, it creates taxable economic activity that raises its own income. When it borrows and spends less, it reduces taxable economic activity and reduces its own income. You can argue about the magnitude of these effects, but they’re not zero, and that explains why the bond market remains willing to lend to the US, which shows not signs of every balancing its budget, but unwilling to lend to Spain which is trying desperately to do so.Report
“When a household borrows money and spends it, the spending has no impact one way or another on the costs of the borrowing. ”
So then why do all those banks and car dealerships and real-estate title companies keep asking to see my credit report? Do they read those things for kicks?Report
Yanno, I thought Europe was supposed to have set itself up by eschewing the excesses of the military industrial complex and instead put all those resources into its people.
In other words, “Where’s the butter, Lebowski?”Report
Wait, they get their butter from Poland???
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Some days I want to just pound my head on the wall. Back at the end of the 1990s we had finally — FINALLY — reached a point of actually practicing Keynesian economics, running a surplus in good times so we could afford deficits in bad times, and we threw it away. Maybe we could have kept it up, maybe not. The situation was somewhat odd in the amount of revenue realized from capital gains. But now we’ll never know how it actually plays out in practice. Or at least not in my lifetime.Report
The US government just barely ran surpluses for a couple of years in the 1990s and that was only because of the Tech Bubble. The 90s were an aberration, not a break from the US government’s long history of structural deficits.Report
Plus, (and this is one of the things that made Gingrich unelectable as the social security went through under his watch and with his vote) a lot of the surplus can be credited to “borrowing” 600+billion from social security and recording it as revenue. Even if you count that as legitimate, the “surplus” only went into making sure the debt was lowered and our PUBLIC debt would appear as if it were lowering.. Our NATIONAL debt went from 4 trillion at the beginning of 1993 to 5.6 trillion by the beginning of 2000 according to the Fed’s own treasury reports.
So, even with the tech bubble, we never ran a surplus. Clinton just used creative accounting to make it seem as if we had.Report
I’d be willing to bet any amount of money that Sarko will lose and a somewhat lesser amount that the US media will come up with some pretty lame explanations for why he lost. Probably Hollande will put the kibosh on some of this business, but that won’t do a thing to solve the long-term problems that France faces.Report