Germany’s Failed Austerity Policies

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.

Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

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Taxes Shouldn’t Be the Main Worry

Financial FAQs

Economist and British Lord John Maynard Keynes opined in the 1930s that in the end we are all dead, so why worry too much about anything else? Well, this particular election year there is something else worrying both parties—taxes.

Taxes shouldn’t be our main worry.  Creating more jobs should take precedence in the debate over growth.  In fact, recent surveys have found it’s the lack of sufficient demand for goods and surveys that is holding up faster growth, not taxes, or regulations, or too big government.

“Data from the U.S. Department of Labor indicate the employers infrequently cite government regulations and intervention as the reason for layoffs. According to the most recent quarterly data on layoffs lasting more than 30 days, employers said business-demand problems were behind more than 40 percent of separations, followed by seasonal factors, financial issues and organizational changes, among other factors. Employers cited governmental regulations/intervention for less than 1 percent of layoffs.”

Republicans worry about inheritance (i.e., death) and capital gains taxes in particular, since so much of their wealth is either invested or inherited. It is reputed by Senate Speaker Harry Reid and others that Mitt Romney pays very little in taxes, and would like even to pay less in his 5-Year Economic Plan to Grow the Economy.

Democrats worry about overtaxing the middle consumer class, but not the upper class. But cutting taxes to anyone means lower tax revenues, which shrinks government at a time when the private sector isn’t expanding enough on its own.

The real problem with both approaches is that neither will pay down our humongous federal budget deficit, unless economic growth picks up and no one as yet is providing a realistic plan to do it. It’s no secret what that is. Someone has to start spending money to make money that creates jobs and so stimulates greater demand for goods and services.

Even our ‘Government is the Problem” President Reagan knew this when he raised taxes 11 times to bring us out of the 1980 and 1983 recessions, mainly spending those revenues on defense. He knew that government had to provide the funds for growth when record interest rates had choked off private credit in the early 1980s.

Graph: CBPP

And President Obama’s $830B American Recovery and Reinvestment Act spending pulled us out of the Great Recession. The Recovery Act was designed to boost the demand for goods and services above what it otherwise would be in order to preserve jobs in the recession and create them in the recovery, says the CBPP.

The Congressional Budget Office finds that GDP has been higher each year since 2009 than it would have been without the Recovery Act (with the largest impact in 2010 when GDP was between 0.7 and 4.1 percent higher than it otherwise would have been). The economy is still benefiting from the Recovery Act, although as expected that effect is diminishing as the economy grows; CBO estimates that GDP in the third quarter of 2012 will be between 0.1 and 0.7 percent larger than it would have been without the Recovery Act.

So how to create more government revenues with which to simulate growth? A starter would be to allow all the Bush tax cuts to expire, bringing us back to Clinton-era taxes that created budget surpluses and 23 million jobs. This would save US about $3.6 Trillion in debt over the next 10 years, according to CBPP. And when estimating the revenue gained by just raising taxes on high-income groups, the Joint Center on Taxation and Treasury find that modest increases in the top marginal tax rates would also raise significant revenue. For example:

• Treasury estimates that allowing the cuts in income taxes for high-income households (those with adjusted gross incomes above $250,000 for married filers and $200,000 for single filers) and estate taxes that were enacted in 2001 and 2003 to expire at the end of 2012 would save a $968 billion over the next ten years.

The ‘real’ jobs numbers I spoke about in June are beginning to show up in July, as jobs added, and 9,000 government jobs lost. The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

Graph: CBPP.Org

This points to further employment growth ahead. Why? Incomes are increasing, as are hours worked, which means increased demand for products and services in the fall; ergo, increased hiring. Although employers began to add jobs in 2010, the economy has recovered only about 4 million of the 8.7 million jobs lost between the start of the recession in December 2007 and early 2010, says the Center For Budget and Policies Priorities. As a result nonfarm payroll employment was 3.4 percent (4.7 million jobs) lower in July 2012 than it was at the start of the recession.

So the economy still faces a long and difficult climb out of the jobs hole created by the recent recession. The private sector created, on average, about 157,000 jobs a month in the past 29 months — a pace somewhat faster than population growth. That has contributed to a decline in the unemployment rate, but much faster job growth will be needed to restore normal labor force participation.

Harlan Green © 2012

THE 'REAL' KEYNESIAN ECONOMICS

The debate has only begun on whether the various stimulus packages are enough to kick-start the economy. Of great help will be Animal Spirits, a new book by two well-known behavioral economists who study the psychological and sociological aspects of financial markets—Nobelist George Akerlof and author Robert Shiller. Professor Shiller is best-known for coining the term “irrational exuberance” in his book of the same name, which predicted the dot-com bubble bursting.

Get Reaganomics off our backs!—translated into layman’s terms, that’s how Akerlof and Shiller begin Animal Spirits (Princeton U. Press, 2009. It is an inquiry into the role of human psychology in economic behavior. The small-government, laissez-faire outlook that Reagan helped popularize has severely damaged the financial system. “Now, three decades after the elections of Margaret Thatcher and Ronald Reagan, we see the troubles it can spawn. No limits were set to the excesses of Wall Street. It got wildly drunk. And now the world must face the consequences.”

What in fact the Obama Administration is trying to do is not only stimulate job formation and retention that will in itself grow demand for more goods and services, but raise the confidence level of consumers and business as well. This is also at the core of British Lord Keynes economic theory. Keynes believed that the Great Depression was caused by a pervading loss of confidence in both business and government to correct the economic malaise of that time.

Animal Spirits cites the crash of 1929, for instance, when speculative exuberance and the narrative of a “new era” of continually appreciating stocks suddenly evaporated, while technical factors such as central bank protection of the gold standard worsened unemployment by causing a deflationary price spiral.

As Keynes pointed out, the fundamental problem was that bankers were too scared to loan, because they thought they would lose their money—sound familiar? And since none of the deficit spending was on a scale needed to stimulate demand, self-perpetuating hopelessness set in. Only with the emergency mobilization of World War II did the shattered national mood, and narrative, begin to change.

Might some parts of President Obama’s stimulus measure not work? Of course. Some economists, including Nobelist Paul Krugman, fear that not enough is being done to give it an immediate boost this time, either. Just put more money in people’s pockets, whether via rebates or tax cuts, say some. But history shows that doesn’t provide much bang for the buck. It doesn’t necessarily get consumers spending again, for instance.

Much of the stimulus spending focuses on increasing productivity and nurturing research and innovation in future technologies. Another part focuses on improving our educational and health care systems. The Congressional Budget Office predicts that the economy may need a boost through 2011, so the stimulus package is aimed at promoting a sustainable recovery, not a quick fix.

After touring through this grim history, our contemporary problems, as severe as they may be, don’t look quite so bad. Profs Akerlof and Shiller end on a reassuring note: “Yet we are currently not really in a crisis for capitalism. We must merely recognize that capitalism must live within certain rules.” And we must take into account that irrational behavior has a real effect on demand, necessitating government intervention.

Harlan Green © 2009