Europe Sees the Light, as U. S. Opts for Darkness

The misguided GOP focus on deficits and austerity in the U. S. is messing up the whole world’s economy.  From the NYT*:

“The Europeans lately have slightly eased their austerity policies, after four years of deep spending cuts and rising taxes that many economists blame for keeping the Continent in recession long after America’s ended.

“And the Obama administration, after years of pressing Europe to adopt American-style stimulus measures, is now presiding — if reluctantly — over European -style austerity that is measurably slowing its recovery. …

“The new reality in the Unites States reduces the president’s already limited leverage in his fiscal debate with Europeans…even as Europe’s woes continue to act as a drag on its trading partners, including the United States.”

I would force every Republican member of Congress to write “Keynes was right” on the blackboard 1,000 times.

*  “Lines Blur in U.S.-Europe Debate on Austerity,” Jackie Calmes

Policy of the One Percent, by the One Percent, for the One Percent

From “The 1 Percent’s Solution,” Paul Krugman, NYT:

“Thus, the average American is somewhat worried about budget  deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face.  And how should the budget deficit be brought down?  The wealthy favor cutting federal spending on health care and Social Security — that is “entitlements” — while the public at large actually wants to see spending on those programs rise.

“You get the idea:  The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor.  What the top 1 percent wants becomes what economic science says we must do.

“[T]he years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers.

“And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make.  To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?”

 

The Fog of Fiscal Flimflam

From “After the Flimflam,” Paul Krugman, NYT:

So we could definitely do worse than the Senate Democratic [budget] plan, and we probably will. It is, however, an extremely cautious proposal, one that doesn’t follow through on its own analysis. After all, if sharp spending cuts are a bad thing in a depressed economy — which they are — then the plan really should be calling for substantial though temporary spending increases. It doesn’t.

But there’s a plan that does: the proposal from the Congressional Progressive Caucus titled ‘Back to Work,’ which calls for substantial new spending now, temporarily widening the deficit, offset by major deficit reduction later in the next decade, largely though not entirely through higher taxes on the wealthy, corporations and pollution.

“I’ve seen some people describe the caucus proposal as a ‘Ryan plan of the left,’ but that’s unfair. There are no Ryan-style magic asterisks, trillion-dollar savings that are assumed to come from unspecified sources; this is an honest proposal. And ‘Back to Work’ rests on solid macroeconomic analysis, not the fantasy ‘expansionary austerity’ economics — the claim that slashing spending in a depressed economy somehow promotes job growth rather than deepening the depression — that Mr. Ryan continues to espouse despite the doctrine’s total failure in Europe.

“So where is this all going? Realistically, we aren’t likely to get a Grand Bargain any time soon. Nonetheless, my sense is that there is some real movement here, and it’s in a direction conservatives won’t like.

“Mr. Ryan’s efforts are finally starting to get the derision they deserve, while progressives seem, at long last, to be finding their voice. Little by little, Washington’s fog of fiscal flimflam seems to be lifting.”

I’m not as optimistic as Krugman about the fog lifting — I think we’re going to be socked in for some time to come — but I hope he’s right.  Maybe the Progressive Caucus will steal in on little cat feet.

Scolding the Scolds

From “Deficit Hawks Down,” Paul Krugman, NYT:

“President Obama’s second Inaugural Address offered a lot for progressives to like. … But arguably the most encouraging thing of all was what he didn’t say: He barely mentioned the budget deficit.

Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

First, they have cried wolf too many times. They’ve spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece, Greece, I tell you. It is, for example, almost two years since Alan Simpson and Erskine Bowles declared that we should expect a fiscal crisis within, um, two years.

“But that crisis keeps not happening. The still-depressed economy has kept interest rates at near-record lows despite large government borrowing, just as Keynesian economists predicted all along. So the credibility of the scolds has taken an understandable, and well-deserved, hit.

Second, both deficits and public spending as a share of G.D.P. have started to decline — again, just as those who never bought into the deficit hysteria predicted all along.

“The truth is that the budget deficits of the past four years were mainly a temporary consequence of the financial crisis, which sent the economy into a tailspin — and which, therefore, led both to low tax receipts and to a rise in unemployment benefits and other government expenses.

“And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression. Which brings me to the third reason the deficit scolds have lost influence: the contrary doctrine, the claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice.

Consider, in particular, the case of Britain. In 2010, when the new government of Prime Minister David Cameron turned to austerity policies, it received fulsome praise from many people on this side of the Atlantic. For example, the late David Broder urged President Obama to “do a Cameron”; he particularly commended Mr. Cameron for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.”

“Sure enough, the sudden, severe medicine cut short Britain’s economic recovery, and threw the nation back into recession.

“At this point, then, it’s clear that the deficit-scold movement was based on bad economic analysis. But that’s not all: there was also clearly a lot of bad faith involved, as the scolds tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had nothing to do with deficits. And the growing transparency of that agenda is the fourth reason the deficit scolds have lost their clout.”  Emphasis added.

IMF Channels Emily Litella on Austerity — Never Mind

Paul Krugman reports (“The Big Fail,” NYT) from the annual meeting of the American Economic Association:

“The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.”

“Well, someone was incorrect, all right.

Of the papers presented at this meeting, probably the biggest flash came from one by Olivier Blanchard and Daniel Leigh of the International Monetary Fund. Formally, the paper represents the views only of the authors; but Mr. Blanchard, the I.M.F.’s chief economist, isn’t an ordinary researcher, and the paper has been widely taken as a sign that the fund has had a major rethinking of economic policy.

“For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake.

“European leaders, having created Depression-level suffering in debtor countries without restoring financial confidence, still insist that the answer is even more pain. The current British government, which killed a promising recovery by turning to austerity, completely refuses to consider the possibility that it made a mistake.

“And here in America, Republicans insist that they’ll use a confrontation over the debt ceiling — a deeply illegitimate action in itself — to demand spending cuts that would drive us back into recession.”  Emphasis added.

Will GOP Succeed Because They Support Failure?

It will be bad enough if Mitt wins.

But it will just kill me if he wins because the failing austerity policies in Europe do so much damage to our economy that they cost President Obama the election, the same misguided austerity policies that the GOP wants to impose here.

So European economic failure would generate GOP success would in turn would generate American economic failure.  Who’s on first?

So Where Are the High Interest Rates?

From “Money For Nothing,” Paul Krugman, NYT:

“For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis.

“But a funny thing happened on the way to the predicted fiscal crisis:  instead of soaring, U. S. borrowing costs have fallen to their lowest level in the nation’s history.  And it’s not just America.  At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.

“The failure of deficits to produce the predicted rise in  interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue).
“Oh, and pay no attention to the warnings any day now we’ll turn into Greece, Greece I tell you.  Countries like Greece, and for that matter Spain, are suffering from their ill-advised decision to give up their own currencies for the euro, which has left them vulnerable in a way that America just isn’t.

“So what is going on?  The main answer is that this is what happens when you have a ‘deleveraging shock,’ in which everyone is trying to pay down debt at the same time.

“But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.

“You don’t even have to make a Keynesian argument about jobs to see that.  All you have to do is note that when money is cheap, that’s a good time to invest.

“That said, you should be a Keynesian, too.  The experience of the past few years — above all, the spectacular failure of austerity policies in Europe — has been dramatic demonstration of Keynes’s basic point:  slashing spending in a depressed economy depresses that economy further.”

Our Limping Economy

GDP growth in the second quarter was only 1.5%, compared to 2.0% in the first quarter.

Our economy must grow between 2 and 2.5% just to keep unemployment, currently at 8.2%, from rising.

As for the third quarter, forecasts are for growth in the 1 to 1.5% range.

This is all good news for Mitt, and Mitt is bad news for us because he wants British-like austerity that would definitely send us back into recession*:

The U. K.’s economy suffered a much larger contraction than expected in the second quarter, heightening questions about the pace and effectiveness of the government’s austerity program and fueling the broader debate across Europe about how to tackle the Continent’s economic woes.

“The deteriorating British economy is likely to intensify the debate both within the U.K. and other debt-laden countries in the West about cuts versus stimulus, amid increasing evidence that austerity is proving a major drag on growth.” Emphasis added.

* “U.K. Stumble Fuels Austerity Debate,” Ainsley Thomson and Cassell Bryan-Low, WSJ

 

Mitt and GOP Offer Voodoo Economics Again

From “What the war over ‘didn’t build that’ is really about,” Greg Sargent, The Plum Line:

“As it happens, mainstream economic consensus is closer to Obama than to Romney on the broader questions here.  Many economists believe the stimulus worked (albeit not as well as we’d like); that tax cuts for the wealthy won’t magically create enough growth to pay for themselves; that more spending now would indeed create jobs; and that more austerity now could make things worse. The public’s views on these matters are not nearly as clear cut.  But on the question of the relationship between government spending and job creation, Romney’s positions are at odds with mainstream economic opinion. ‘The debate in Washington has become completely unmoored from this consensus,’ Betsey Stevenson and Justin Wolfers write today.  ‘Republicans have pushed their representatives to adopt positions that are at odds with the best of modern economic thinking.’

Romney does not have a plan to fix the short term crisis, in the sense that he’d be proposing exactly the same things if the economy were doing great.  But the politics of the presidential race are such that Romney needs to promise that electing him would fix the crisis.  To make this case, he has to sell the American people on the idea that government — and Obama’s hostility towards individual initiative and American free enterprise — are to blame for holding back the recovery, and that shoving both of those things ‘out of the way’ will reignite the economy.  That’s why Romney continues to falsely claim that stimulus spending only succeeded in growing government and didn’t help the private sector at all. That’s why he continues to falsely claim that Obama ‘demeans success.’  That’s why he continues to falsely claim that Obama thinks only government, and not individual initiative, creates jobs — and that this is why you’re suffering.

“These ideas are essential to Romney’s entire argument. Without them, he doesn’t have one.”  Italics in original; emphasis added.

The austerity the GOP wants to push in this country is failing in Britain.  The latest numbers there show a double-dip recession.  That’s what Mitt offers. 

I think the question for this election isn’t so much “Are you better off now than you were four years ago?” (although clearly we are, because the economy was losing 750,000 jobs a month then), but “Could you be much worse off four years from now?”