Tuesday, January 08, 2013

The march of austerity in Europe and the US

Wolfgang Münchau warns of the possible recessionary consequences of the United States adopting some form of the economic austerity course being pushed hard by President Obama and the Republicans in US joins misguided pursuit of austerity Financial Times 01/06/2013. Münchau fears "I fear that the US is blindly rushing into semi-automated austerity, which is exactly the mistake we have made in Europe. The problem is not the size of the national debt as such, which is manageable in both cases, but our policies in dealing with it."

The consequences of the various European austerity measures have been grim, and look to become even more so:

In southern Europe, austerity has already led to a big increase in poverty and inequality. A report by Oxfam in Spain says that if the current policies are not reversed, Spain could see an increase in the percentage of the population below the poverty line from 27 per cent to 40 per cent in a decade. I find it hard to see how Spain could maintain its current course politically if that prediction turns out to be true.
Increasing inequality can become a kind of death loop, or at least stagnation loop, in which growing inequality prevents healthy growth and weak growth allows inequality to continue increasing. Very much a non-virtuous cycle.

He sees the key political failure and the decline of the ability of current democratic governments to act on a more general collective interest:

There is a deeper reason why we are all in this mess. It has become more difficult for political systems to defend the collective interest – which I would define as the pursuit of policies to end the recession, then deal with the debt overhang vigorously afterwards. The collective action problem is a natural deficiency of a monetary union with decentralised decision making. But it can also occur at the level of sovereign nation states when society lacks broad consensus over economic policy. In their respective pathologies, the US and the eurozone have become remarkably similar.
He doesn't put it exactly this way, but the neoliberal conceptual capture of the center-left parties along with the center-right has made the narrow class interest of Big Capital the central concerns, even in outright defiance of the clearly expressed desires of voters. Just as the Great Depression brought serious failures in democratic governance, this Lesser Depression is doing so, as well.

He talks about "perma-austerity" in Europe and observes that Angela Merkel's Fiscal (Suicide) Pact is already becoming a key instrument for enforcing it. "Its prescription of a near-zero structural deficit will force everyone to continue austerity indefinitely. It leaves room for automatic stabilisers, but only up to a point. If long-run growth falls, as I would expect, the structural deficit would be revised upwards, requiring further austerity."

Peter Coy in the cover story for the 01/07-13/2013 Bloomberg Businessweek, The Fiscal Cliff Deal and the Damage Done 01/02/2013, also warns about the danger of austerity:

The primary goal of government should be to get the economy running at full throttle once again. That will restore jobs and wealth and increase tax revenue, which narrows budget deficits. Mark Blyth, a Brown University political scientist with a forthcoming book called Austerity: The History of a Dangerous Idea, says: "Democrats should have said to Republicans, 'You’re the guys who created the debt. We'll deal with the debt when we return to growth. Get lost.'"

... Budgetary puritans may be sincere, but they're confusing a short-term problem with a long-term one. In the 2020s and beyond, the country risks an explosion of debt caused by the aging of the population and rising health-care costs. That must be dealt with. But in the present, with the economy still operating 6 percent below its potential (chart), it emphatically does not need a big dose of deficit reduction.
The chart to which he refers is this one from the article:

Elsewhere in the article, he repeats the elite consensus about how we need to be throwing starving grannies out into the streets by cutting benefits on Social Security, Medicare and Medicaid to appease the Great God Free Market. And he repeats the faith that in normal times the Federal Reserve can handle all economic policy adjustments through their arcane magic. But he does recongnize that in current depression conditions with interest rates up against the "zero lower bound," Keynesian fiscal policy is what is needed:

It pains deficit hawks to hear this, but ever since the 2008 financial crisis, government red ink has been an elixir for the U.S. economy. After the crisis, households strove to pay down debt and businesses hoarded profits while skimping on investment. If the federal government had tried to run balanced budgets, there would have been an enormous economywide deficit of demand and the economic slump would have been far worse. In 2009 fiscal policy added about 2.7 percentage points to what the economy’s growth rate would have been, according to calculations by Mark Zandi of Moody’s Analytics (MCO). But since then the U.S. has underutilized fiscal policy as a recession-fighting tool. The economic boost dropped to just half a percentage point in 2010. Fiscal policy subtracted from growth in 2011 and 2012 and will do so again in 2013, to the tune of about 1 percentage point, Zandi estimates.

It could have been worse. President Obama has been a smarter slump fighter than British Prime Minister David Cameron. The Tory vowed to reduce budget deficits by curtailing spending. But the government’s cuts weakened the economy, clipping 2012 growth to roughly zero. It’s hard to balance the budget when the economy is that weak: For all its painful austerity, Britain’s deficit-to-GDP ratio is no better than America’s. And you say “trillion-dollar deficit” like it’s a bad thing!
Wolfgang Münchau thinks much of Europe and the United States are looking at a Lost Decade or more, starting with the crisis that began in 2007 and intensified severely with the financial crisis of 2008:

All over Europe, governments have pushed themselves into a corner where austerity has become the default choice. George Osborne, the UK chancellor, said recently he expected austerity to continue until 2018. I would take this as a ballpark estimate for most of the North Atlantic region. This is not an environment in which companies invest, or in which consumers step up spending. My conclusion is that we are not going to see a return to pre-crisis growth rates in the austerity club for several years. If the US becomes a fully paid subscriber to this club, then I would expect the same to happen there.
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