Tuesday, May 1, 2012

The Case for Austerity

Most people know that Paul Krugman’s attacks on austerity have been wrong-headed and self-serving.

Krugman is laying down a predicate that will enable him to blame the political right if the world slides into another recession, or worse. 

In particular, he has been arguing that more government spending, more debt creation, and more income redistribution can solve Europe’s problems.

The ploy is so transparent that even someone who is not a trained economist can see through it. If the arguments were not sufficiently lame, Krugman’s typically shrill rhetoric gives the game away.

This morning in the Financial Times, Gideon Rachman, a writer who is far more knowledgeable on these matters than I, offers a cogent response to the Krugman anti-austerity crusade.

In Rachman’s words:

If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment.

Krugman would want us to believe that the politicians who are cutting budgets are less intelligent than he. In truth, austerity is the bond market at work.

Rachman explains:

As for Italy and Spain, they are not cutting their budgets out of some crazed desire to drive their own economies into the ground. Their austerity drives were a reaction to the fact that markets were demanding unsustainably high interest rates to lend to them. There is no reason to believe that the markets are now suddenly prepared to fund wider deficits in southern Europe. The “end austerity now” crowd respond that it is the responsibility of Europe’s dwindling band of triple A rated countries to go on a consumption binge and so pull their neighbours out of the mire. But the assumption of unlimited Dutch and German creditworthiness is unconvincing – as the market reaction to the Dutch failure to agree a budget, last week, illustrated.

Rachman declares that austerity is inevitable. In order to soften the blow he proposes that policy makers reform the labor market by releasing the stranglehold that bureaucracy (and labor unions) hold over it.

He offers these examples:

My favourite recent example was a story in the New York Times of a Greek entrepreneur, whose efforts to start an internet business involved an odyssey of form-filling, culminating in an official demand for a stool sample. High rates of youth unemployment in countries such as Spain and Italy are closely connected to the excessive protections and benefits for workers on full-time contracts – which make employers wary of taking on new hires. As one Spanish businessman recently complained: “In this country, it is easier to divorce your wife than to sack an employee.”

Ask yourself this: how often has Paul Krugman argued in favor of labor market reforms? How often has he argued against the labor unions that have been instrumental in making the labor market less of a market and more of a racket?


anna said...

did you catch Bernake on c-span? He gave the example of East Germany, that is only 1/3 as productive as West Germany, making a case that communism wrecked their work ethic and it can't be recovered. He links that to us, why he need not act to stimulate jobs, because American workers are the problem and we're better off not trying to help 'them'. Of course the economy is fine now, if you don't count the housing market and unemployment, there are plenty of people doing quite fine, and the rest aren't actually necessary, that's his point.

Paul has a different idea - he has the idea that we don't need to leave people behind, and that the overall economy will be on sounder ground if there is a strong middle class, or even just a middle class, cause they're the ones who buy stuff. So for him fixing the economy is getting more people working and paying taxes and purchasing crap. Now the job loses are public jobs, mainly teachers and firefighters and police officers - who needs 'em?

I don't think many Americans pay that much attention to the economists, but for those who do, there are those who like what Paul says and find his reasoning sound and historically based. He called out Bernake for being dishonest, which must have upset cause him cause he then made that east germany speech.

I think if for nothing else, and there is else, it just feels better to live in a more fair society, or at least where poverty isn't visible, but just with my own friends, and I don't have that many friends, there is some fear over unemployment and health care poverty, and that doesn't make me feel very good. I'd rather pay more in taxes and have a society where people get health care and where kids can attend great and safe schools.

Stuart Schneiderman said...

Thanks, Anna, for the great comments. I am a bit agnostic on all of it, because I am not an economist. If it were true that we can spend our way out of these problems, that would be one possibility. If we could tax our way out, that would be another possibility. I have my doubts about whether we can really take that road... because after a while we are going to run out of money and if we keep printing money we are going to have a very bad inflation.

Or else the cost of borrowing will become so expensive that we will end up like Greece and Spain.

I liked Rachman and I like reading James Grant on this question. I try to read people who are not tied to a political party or do not have a political bias.

As of now, if you look at the state governments those that are trying to solve their problems with new taxes are not doing so well. Those who tried to control spending by limiting the power of the labor unions are doing better. As Chris Christie has often said, sometimes the choice is between less generous union contracts and more jobs.

It doesn't much help to have a union contract when you don't have a job.

I think that the power of the unions is a major issue. Rachman mentions it prominently; Krugman does not.

anna said...

I worry more about deflation than inflation, so I'm for printing money. Econ is a weird social science. But I do think this is a difference in morals, and the Bernake's have the morals and the Paul's are the practical ones, he's evidence based is what I mean.

I think there is a disparagement of American workers going on, and if the real problem, as says Brooks, is that we're more productive with fewer workers, and there will never be enough jobs to keep those who aren't highly trained employed, then maybe blaming the unemployed makes some feel better.

I found your blog by accident, and I am quite glad about it. I'm a Lacanian analyst, possibly obviously?, but I've worked in addiction for years and behavior mod works great with many. I was re-reading death of an hero before I found your blog - what a pleasure.

Thank you, great to meet you in cyberspace (after all these years)

Stuart Schneiderman said...

Thank you for the comments, Anna. I'm very happy to meet you in cyberspace.

If I may, you might be interested in the current debate in France over autism.

I have written a bit about it, and filed the pieces under the autism tag at left.

I won't say anything more... you will be shocked by it.

Stuart Schneiderman said...

I should add that I am also very concerned about deflation. When you are in serious debt inflation is your friend and deflation is your mortal enemy.

That fear is clearly governing fed policy and it is clearly the reason why Krugman does not fear inflation.

I do think that there are limits to inflation, and that many people, like the elderly on fixed incomes, who suffer from inflation.

anna said...

it seems like an ordinary guild thing to me, an artifact of old Europe. I mean, there are plenty of fathead Lacanians who think psychoanalysis is the answer to everything and that we have a special lock on knowledge, (well, we do, kind of, in the ego freeer zone anyway, but it's barely a treatment in how one usually views treatment), but it's not a special mistake for any one group, those who aim to protect their status and billing exclusives.

Here you can see it between the psychiatrists, psychologists, social workers and marriage counselors, fighting to keep each other out. At Kaiser the psychologists once went nuts over the possibility of hiring marriage counselors. Normally fairly fair minded people can get very upset over some other license which isn't supposedly as lofty, when its pretty much a given that experience counts for more than graduate units, anyway I think it's a given.

I tried to watch the show from your link, but it was blocked and I am kind of glad I didn't see it. I don't much like watching people shame themselves and I don't blame them for wanting to wash it away. When you've only been speaking with the like-minded, you can devolve into some weird thinking. The son in law set that straight. But I can imagine falling into a similar trap for narcissism if I don't take enough time to laugh at myself.

How about writing an essay on whether or not Romney is on the autism spectrum (to me he is, which is one of the reasons I don't hate him, although that's hardly his only problem). He doesn't make true eye contact and he seems to have trained to be a human, plastered some 'warm' look on his face, and he does not correct previous social mistakes, he makes them over again. I think he has a handicap that was masked by his tight family and social bonds. A lot of businessman I have met seem weirdly out of touch, and I don't think autism spectrum keeps anyone from making deals (a form of D&D, or chess?).

It's neurological and not amenable to the so-called psychodynamic therapies. On the other hand training isn't much good either, it's only for social acceptance and you can't train for every situation. And while I suspect you're a great trainer, most come from psychology and it's not a field that seems to attract those with social skills.

I know a sweet natured, brilliant and socially trained autistic man who still can't tell if someone is mocking him. There is something rather good-faith about the spectrum that I find rather wonderful and not at in in need of changing.

anna said...

to the comment on deflation, the elderly are suffering more from the lack of interest on their saving accounts, they don't invest much when they can't afford to lose much so a lot of the simple savings in banks is retired people.

It's more the rich, who have stockpiled scads, that don't want inflation, but I don't know why they care so much, they could just invest or buy more crap and not hold it and admire it. It's a kind of miser thing probably. None of them would invest in the auto industry when it was in need of investment, that's why Obama had to do it and they were sitting on mints and they would have received the returns (although it's fine with me that taxpayers made a profit).

Stuart Schneiderman said...

I know that the video of the film about autism can no longer be watched via the link. As I reported in one of the other posts the French Lacanians managed to get the film censored... and to get the filmmaker fined for defamation... go figure.

I have written a number of posts about Romney... not very recently... and I have tried to express what you are seeing in him, that there is something not quite right about him. I have not tried to diagnose him, but clearly there is a lack of human connection in the way he presents himself.