Paul Krugman has again been making some apposite comments on the EU economic crisis. First he slams Olli Rehn for being an ideological neo-liberal contemptuous of French democracy and with no real interest in furthering economic recovery in the EU:
The Austerian Mask Slips – NYTimes.com
Simon Wren-Lewis looks at France, and finds that it is engaging in a lot of fiscal austerity — far more than makes sense given the macroeconomic situation. He notes, however, that France has eliminated its structural primary deficit mainly by raising taxes rather than by cutting spending.
And Olli Rehn — who should be praising the French for their fiscal responsibility, their willingness to defy textbook macroeconomics in favor of the austerity gospel — is furious, declaring that fiscal restraint must come through spending cuts.
As Wren-Lewis notes, Rehn is very clearly overstepping his bounds here: France is a sovereign nation, with a duly elected government — and is not, by the way, seeking any kind of special aid from the Commission. So he has no business whatsoever telling the French how big their government should be.
But the larger point here, surely, is that Rehn has let the mask slip. It’s not about fiscal responsibility; it never was. It was always about using hyperbole about the dangers of debt to dismantle the welfare state. How dare the French take the alleged worries about the deficit literally, while declining to remake their society along neoliberal lines?
There was a time when France was proud enough to stop such idiotic meddling in its affairs: Is there nothing that Olli Rehn can do or say that might get him sacked?
Next Krugman weighs in against the idiotic “recovery” narrative currently being spun by the Commission and the Cameron/Osborne Government (and no, I have not forgotten that the LibDems are supposed to have some input too…)
As Simon Wren-Lewis says, if some positive growth, eventually, means that your policies have been successful, then a policy of simply shutting down half the economy for a year or two, then letting it start up again, is a smashing success.
—<snip>—
So the claims of success coming from both the European Commission and now from Cameron/Osborne are deeply stupid — but that doesn’t mean that they won’t gain traction. And as a political matter, bouncing dead cats can work very well. Combine Wren-Lewis’s thought experiment about shutting down the economy with the substantial political science evidence that elections depend not on the level of income but on its rate of growth in the runup to the election, and you conclude that from a sheer political point of view gratuitously depressing the economy for the first half of your term in office can be a very smart move.
We can see the same dynamic working in Germany: Despite years of austerity and depressed growth, Germany seems likely to re-elect Merkel on the back of some slow and belated glimmers of economic growth in the last few months of her term. In another post, Krugman ascribes this to The Soft Bigotry of Low European Expectations – NYTimes.com
It really is kind of pathetic to see European leaders claiming vindication after one whole quarter of positive growth, at the thrilling annual rate of 1.2 percent. Just to say the obvious: when you’ve suffered a huge hit to output and employment, you’re supposed to have a long period of fast growth to make up the lost ground. Otherwise you’re making the definition of success way too easy.
To illustrate my point, here’s a comparison I’ve been looking at. It’s between Latvia — which is the closest thing we have to an actual austerity success story, since it has been growing fast, even if it’s still far below pre-crisis levels — and another country, which isn’t Latvia. Here’s the chart:
Two big success stories, right? But who is Not Latvia?
Well, it’s the United States from 1929 to 1935; data from the Millennial Edition of Historical Statistics of the United States (Latvia data from the IMF). Strange to say, most of us think America was still living through the Great Depression in 1935.
So Europe’s biggest neo-liberal success story is actually faring considerably worse than the USA during the Great Depression – a time universally perceived as the low point of 20th. century capitalism. How could our expectations of what our leaders should do have been lowered so much? How is it that the architects of the greatest economic failure since the Second World War are still in office, never mind quite likely to be re-elected/re-appointed?
Krugman laments that European policymakers excuse the EU’s awful performance on the grounds that it is wrong and unfair to compare current performance against the hugely inflated bubble economies that existed prior to the crash. However this excuse fails rather miserably when one compares Ireland’s performance to that of Thailand post crash:
The Baht and the Bubble Excuse – NYTimes.com
In any case, Asia from 1997 on provides a useful comparison. Southeast Asia in the mid-90s was a bubble — oh, boy, was it a bubble, with huge current account deficits and wild speculation in real estate. Nonetheless, by contrast with Europe’s crisis economies, the Asians fairly quickly returned to and then passed the pre-crisis peak:
I will say, 15 years ago it would never have occurred to me that we would be looking back at Asia’s crisis as a success story.
Part of the problem seems to be that many macro-economists and policy makers appear to be operating from a theory of an economy being a self-equilibrating system not requiring much in the way of political/fiscal intervention to come out of recession and back to potential growth:
License To Stagnate – NYTimes.com
So what’s wrong with this pretty picture? Two ugly zeroes.
First is the zero lower bound on the interest rate: after a sufficiently large shock, the Taylor rule may say that you should keep cutting rates, but you can’t. Second is downward nominal rigidity, which isn’t quite as binding a constraint, but does lead the Phillips curve to be non-vertical in the face of very low inflation; as an IMF study of persistent large output gaps found, even years of a deeply depressed economy tend to produce at most slow, grinding deflation, and more usually slight positive inflation, not the ever-accelerating deflation the standard model would have predicted.
So here’s what happens after a large negative shock to the economy: the central bank finds itself up against the zero lower bound, so that all it can do is resort to controversial unorthodox measures. It might do that, or fiscal policy might be forced into action, if the economy really were suffering from accelerating deflation; but instead all you see is low inflation, which might even lead some central bankers to declare that they were doing their job just fine.
In the Bond movies, two zeroes meant a license to kill. In monetary policy, two zeroes — the hard zero on interest rates and the soft zero on wage changes — can, all too easily, give central bankers a de facto license to let the economy stagnate, remaining far below potential for an indefinite length of time.
As far as the Olli Rehns of this world are concerned, the latter problem – the soft zero on wage changes – is of course all the fault of the labour unions and the lack of “labour market reform”… I.e. the failure to impose even greater inequalities (and deflationary pressures) on European societies. And this is before one even considers the lack of a devaluation option for Eurozone countries in the grips of recession…
For all the progress of economic and political debate in the internet era, we are seeing perhaps the most complete example of popular ideological capture by our neo-liberal elites who have been arrogating to themselves the fruits of virtually all economic growth over the past 30 years. Most people seem to have come to accept declining growth, increased inequality, high unemployment and a withering welfare state as an unavoidable norm and are prepared to grasp at any straw indicating even a minor recovery.
Merkel’s election strategy seems to be to demonstrate that Germany is not Greece – whilst ignoring the degree to which German dominance has caused the Greek crisis. Scapegoat somebody else and make your people glad they haven’t been (relatively) scapegoated (yet) seems so be a winning strategy. Scare people about debt and economic uncertainty and then offer them the salvation of a few crumbs from the rich man’s table. It is a psychological and rhetorical strategy well known to any hell-fire preacher: make people afraid of eternal damnation and they will be glad to pay their supplication to the State/Church as if it were an unavoidable insurance premium.
Whatever happened to the socialist revolution, never mind the ideals of European solidarity? Do we really need a war every generation to remind us of the horrors of allowing our elites unfettered access to power and the means of public propaganda? Where is the counter-cultural revolution, the class analysis, or the organized opposition to such policies? With European social democracy having been effectively assimilated by the elite, where is the new dynamic of change to come from?
