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Sunday, May 13, 2012

Economists Agree: Austerity Not The Answer


Demonstrators shout slogans during a protest to mark the anniversary of the "Indignados" movement in Madrid, Spain on Sunday. Tens of thousands of Spaniards took to the streets to protest the handling of the country's worst crisis in decades.


















Demonstrators shout slogans during a protest to mark the anniversary of the "Indignados" movement in Madrid, Spain on Sunday. 
Tens of thousands of Spaniards took to the streets to protest the handling of the country's worst crisis in decades.

Excerpt: "To (the Germans), economics is a branch of moral philosophy," Martin Wolf (chief economics commentator for the Financial Times) says, "and [to them] it's immoral to promote growth by increasing fiscal deficits." Many believe Germany's austerity plan will ultimately fail in Europe. Mark Blyth, a professor of international political economy at Brown University, tells NPR's Raz that austerity hasn't worked at all and that it was quite predictable that it wouldn't work... "If everyone tries to pay back the debt all at the [same] time, all you end up doing is shrinking the economy." When you shrink the economy, you end up reducing the amount of tax that you can collect — thus the amount of debt you can pay back. Over time, this causes the debt-to-GDP ratio to get worse rather than better. "All of the countries that have [gone] on austerity programs over the last two years — now have more debt rather than less," he says. 

"A branch of moral philosophy."
That's the nub. 

Conservatives want to punish irresponsible "commoners" even if punishment deepens the damage. 

Liberals, on the other hand, want to pick up the pieces and muddle through, knowing full well that "the next boom/bust" will come as surely as night follows day and that it will be caused by economic bigwigs pumping their own profitability through irrational exuberance.


It takes two to tango... but money bags always calls the tune.

Voters, Economists Agree: Austerity Not The Answer



 In the streets and public squares across Spain on Saturday night, the cries of a mass movement calling itself the Indignados rang out, railing against austerity measures imposed by the European Union.
May 13, 2012
In Greece the next morning, Alexis Tsipras, the head of a far-left opposition party, held a news conference to say he wouldn't join a coalition government that continued the path of austerity.
"The people who have run the country for two years and have signed on to a program that has destroyed the Greek economy and society have not heard the message of the people," Tsipras said.
"Blackmail," he called the European bailout plan for Greece.
Of the 17 countries that use the euro, eight are now in recession and more are expected to go into recession this year. Europe's economic implosion is now poised to eventually affect the U.S.'s own economic recovery if a solution cannot be found.
The German Solution For A Greek Problem
Greece is in its fifth year of recession with no relief in sight. The nation has borrowed 240 billion euros to keep its economy afloat, but as a result, the government has had to slash pensions, government salaries and public services along with raising taxes. More than half of all young Greeks are unemployed.
Last week, angry voters threw their support behind far left and far right parties that oppose the terms of the European bailout. This week, those parties failed to form a coalition government.
A growing chorus of economists and politicians in Europe are now blaming one thing: a strict austerity regime engineered by Germany. Martin Wolf, chief economics commentator for the Financial Times, told weekends on All Things Considered host Guy Raz why the Germans have been so rigid in their demand for fiscal discipline.
"To them, economics is a branch of moral philosophy," Wolf says, "and [to them] it's immoral to promote growth by increasing fiscal deficits."
Germany also opposes using their economy — which is doing OK but not great — to support the borrowing by the weaker countries who, Germans feel, mismanaged their affairs.
No One Solution Fits All
Some argue that nations can't cut their way to economic growth, but Wolf says that's not the problem. There is no catch-all solution for what is happening, he says, and trying to apply one is "nonsense economics."
"We seem to have [gotten] ourselves in a way of thinking about economics, that there are permanent, eternal truths which apply to all circumstances irrespective of precisely what's happened and why you are where you are," he says.
There are circumstances, he says, in which cutting the fiscal deficit sharply is fully compatible with recovery.
"But in the current circumstances in Europe, I do not expect these programs to generate a significant recovery," he says.
There's been some talk of Greece simply pulling out of the euro, but Wolf says that would present its own challenges, like introducing a new currency and banking system. They would also run the risk of ending up in a period of hyperinflation, he says.
The Trouble With Austerity
Many believe Germany's austerity plan will ultimately fail in Europe. Mark Blyth, a professor of international political economy at Brown University, tells NPR's Raz that austerity hasn't worked at all and that it was quite predictable that it wouldn't work.
"You can't cure debt with more debt," Blyth says. "If everyone tries to pay back the debt all at the [same] time, all you end up doing is shrinking the economy."
When you shrink the economy, you end up reducing the amount of taxation that you can collect — thus the amount of debt you can pay back. Over time, this causes the debt-to-GDP ratio to get worse rather than better, he says.
"All of the countries that have [gone] on austerity programs over the last two years — they now have more debt rather than less," he says.
If Europe sticks with its austerity regime, Blyth says those countries will not recover. He calls the euro zone a "doomsday device" because its massive banks are full of bad assets and incredible vulnerabilities.
"What they've built is the gold standard," he says. "And the last time we tried to run a gold standard in a democracy in Europe in the 1920s and 1930s ... it didn't end very well."
Effects On The U.S. Economy
Christina Romer was once President Obama's top economic adviser and is now an economics professor at the University of California, Berkeley. She tells NPR's Raz that the ripples felt in the U.S. from Europe's economic implosion could be significant.
"Europe is one of our biggest trading partners, so when they fall back into recession they're buying less from us," Romer says. "That means less demand for American businesses."
Many economists are predicting that U.S. economic growth will be about 3 percent this year. What worries many of those economists, Romer says, is if the economic and political instability in Europe gets worse.
"If you have a true financial crisis in Europe, if you have countries starting to leave the euro [and] if you have a much more severe recession, then it is a whole new ballgame," she says.
While the instability in Europe won't completely hinder growth in the U.S., Romer says it will slow it down significantly. President Obama has stressed the importance of exports in helping the U.S. recover. If low economic growth in Europe shrinks demand for American goods, however, it's going to make America's own economic recovery difficult.
"Until everybody starts growing again, it's going to be hard to see the really strong kind of growth," Romer says.

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