In the austerity trap

[ddstory.livejournal.com]

Like I promised last time, here's a separate take on the German austerity case. Thing is, the economic clouds have been gathering over Germany for quite a while now. The leading research institutes have significantly downgraded their forecasts about the German economic growth to 1.3% for 2014 and 1.2% for next year. And this is just the latest of a string of bad news for the Germans. Prior to that, exports shrank, and industrial projects reached an all-time low since the 2009 crisis. What's worse, the core of the German economy, machine building and industrial construction, was particularly severely affected.

Meanwhile the IMF has warned of the danger of a new world crisis and in turn has edited their forecasts for both the global economic growth and Germany's GDP. Other indicators like the moods among the business circles, the situation on the stocks exchange and among the households, have been deteriorating for months as well.

So far the German government has been rather eager to use the worrying signals in the economy to justify the imposition of tighter austerity policy on its lesser neighbors. Merkel's main message and that of her finance minister Schaeuble to the governments of France and Italy has always been: Follow the German example and all will be fine.

Now this string of bad news has exposed a well-concealed truth: that the German economy, which is very dependent on exports, cannot grow while its European neighbors are having problems. After all, this is where 2/3 of the entire German exports end up. Other key world economies are also hardly having cloudless days. China and Brazil for example. And those are countries Germany can do nothing about. But Europe is another story. Germany can do something about Europe - if they wanted to.

Merkel has always opposed any solidary approaches to finding a solution to the crisis: from the issue of Euro bonds to common state securities, to a unified system of guaranteeing deposits in the fiscal union - she has had reservation on all of that. She has refused to accept any propositions from France and Italy for loosening the policy of strict austerity, and heed the insistence that Germany should start investing more again. And it's exactly the investment in infrastructure and education that's most urgently needed right now. While public and private investment combined used to constitute nearly 1/4 of the German economy back in the early 90s, nowadays their share has dropped to 17%, which is way below the average for the strongest OECD economies, and definitely less than EU's average. It's notable, by the way, that countries with higher government gross investment are generally doing much better than those with low investment:

Instead of heeding these calls though, finance minister Schaeuble has stayed stuck with his project of a "balanced budget", or the so called "black zero". It's his way of showing his European partners that they should be following the German model. But a growing number of experts believe this is just a famous and vastly overrated project which isn't even economically useful for the moment. French prez Hollande is probably secretly applauding these conclusions right now.

Nevertheless, Herr Shaeuble still stubbornly insists that no adjustments should be made to the strict course of austerity, an idea that he calls "reckless". Granted, his skepticism about creating new debt is probably coming from good intentions. We all know how those fiscal conservatives are. But it'd be also dangerously wrong to ignore the current signals coming from the economy, and blindly insist on keeping the course and not changing the policy, no matter what. After years of economic stagnation, strangled and dried-out economy, 26 million unemployed in the EU, weakened social systems and nationalist parties constantly gaining ground in response to all that, you'd think all of these signs should've been enough to drive the point that perhaps it's time to stop blindly following the austerity dogma. But I guess there'll be some more turmoil needed, before even the leaders of presumably the most prudent, pragmatic and efficient society in Europe could eventually figure out that it's time for a change.

Pouring money onto problems does not necessarily solve them, granted. On the other hand, though, pouring water into a stagnant watermill in order to get it running again, is hardly the reckless waste of resource and effort that the likes of Herr Schaeuble and Frau Merkel would have us believe it to be.

Comments

[johnny9fingers.livejournal.com]

But but but Keynesianism is Communism...amirite?

Many of us have been infected with the idea of fiscal conservatism to some degree or other, even when it appears such infection in an extreme form transmits a kind of qualified madness, in the shape of denial, observable given the responses to real-world events and data.

I have come to the conclusion that once the disease has taken hold, little short of death will stop the hold the infection has on the individual.

I hope I'm wrong, of course.

[ddstory.livejournal.com]

But, but, "history shows that Keynesianism has failed!" (A meme that I've been hearing quite often lately).

[johnny9fingers.livejournal.com]

I know. It's quite bizarre. But there you go.

I guess it's not economists who have suggested that...but I may be wrong again: I so often am.

[sandwichwarrior.livejournal.com]

No, but like communism history has shown that diverse populations of human beings are incapable of implementing Keynesianism on any meaningful level without some existential threat to motivate them. It's only had one great success (FDR's New Deal) and even that one comes with an "asterix" (Mobilization for War followed by extremely rapid population growth).

Ironically it seems that for all their talk of "intelligent design" Conservatives have grasped the concept of evolution and it's implications at a far deeper and more intuitive level than their ideological opponents (http://en.wikipedia.org/wiki/Homo_economicus).

[ddstory.livejournal.com]

All they've ever grasped is that a change of the status quo is a potential threat to their privileged status.

[sandwichwarrior.livejournal.com]

Just as the opposition has never actually had any moral objection to exploitation or slavery . They just want to be the ones holding the whip.

[ddstory.livejournal.com]

Yeah, well, using tu quoque still won't change what I said.

[fizzyland.livejournal.com]

You're being ridiculous here.

[abomvubuso.livejournal.com]

Well, Germany had accumulated over 2.1 trillion euros of debt for the last few decades. Now they're swinging into the other extreme. Neither is good enough.

[htpcl.livejournal.com]

My country was bragging until very recently that it's one of the most fiscally disciplined governments in Europe, with the strictest grip on its purse, etc. And look all the good that has done for us. We're virtually ranking at the bottom of every possible economic and social ranking in the EU.

Keeping money and resources locked up is not a solution. In today's world, the money and resources should be constantly flowing, circulating, moving - and creating more of it.

[johnny9fingers.livejournal.com]

Indeed.

May I suggest a daily quote for: "Keeping money and resources locked up is not a solution. In today's world, the money and resources should be constantly flowing, circulating, moving - and creating more of it."

Because that's the point as I see it.

[htpcl.livejournal.com]

Sure thing.

[luvdovz.livejournal.com]

If the facts don't fit the theory, change the theory, goes the old adage. But too often it is easier to keep the theory and change the facts - or so Merkel and other pro-austerity European leaders appear to believe. Though facts keep staring them in the face, they continue to deny reality.

Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.

But every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.

Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.

But Merkel will have none of it. She'll wake up though. She's becoming increasingly isolated on austerity, and when enough pressure is mounted against her, she'll have to come to terms with the fact that her policy is not working the way she was hoping it would.

[sandwichwarrior.livejournal.com]

If the facts don't fit the theory, change the theory, goes the old adage. But too often it is easier to keep the theory and change the facts - or so Merkel and other pro-austerity European leaders appear to believe. Though facts keep staring them in the face, they continue to deny reality.

The same thing applies in the opposite direction. Even without the PIGS example, German's have good reason to be wary of out-of-control deficits (http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic). Remember that a society's labor force needs to produce enough to support both themselves and the non-working population (children, retirees, welfare recipients, etc...) in order for that society to remain solvent and for quality of life to remain stable, much less improve.

Government spending produces 0 revenue therefore deficit spending can only "prime the pump" if the labor force is growing faster than the deficit.

So long as the ratio of "work to debt" is growing an individual citizen's share of the public debt will shrink (50 people each owing 1$ rather than 5 people owing 10$), making that debt easier to pay off, and allowing the economy to recover or grow. If on the other hand, the ratio is shrinking (as it does when the deficit is growing while labor shrinks or remains stagnant) each individual citizen's share of the public debt will grow. The more in-debt your citizens get the less they have to spend, and the less taxes you collect.

Unless you do something to keep the work to debt ratio in check (like reigning in public spending) you will eventually find yourself in situation where people will, quite rationally, start using your banknotes as wallpaper because clearly, that's all they're good for

[luvdovz.livejournal.com]

"The opposite side does it too". Tu quoque again.

"Out-of-control deficits" is not the only alternative to severe austerity. False dichotomy.

Any other fallacies that you feel like employing today?

[sandwichwarrior.livejournal.com]

"Out-of-control deficits" is not the only alternative to severe austerity. False dichotomy.

Bullshit.

The OP isn't objecting to "severe austerity" the OP is objecting to the idea of Germany having a "balanced budget".

[luvdovz.livejournal.com]

I get it. You didn't even read the post. But that shouldn't be my problem.

[ddstory.livejournal.com]

Nonsense. Austerity is exactly what I'm objecting to. The whole point here is that austerity is detrimental to an economy. Schaeuble's budget is only called "balanced". In essence, it's tightening the belts and strangling the economy.

Stop denying reality and substituting it with your own. Putting words in my mouth and changing my point for me is insulting.

Seriously, I can't even remember when was the last time when you engaged in a discussion in good faith. You're the epitome of the subtle type of troll, the one who's only skirting the rules while pretending to have a discussion on the points, while grinding at your interlocutor's nerves with your constant fallacies.

I think I'm done talking to you for good.

[luzribeiro.livejournal.com]

Government spending produces 0 revenue

Wait a minute, how the hell did you arrive at a point where preposterous assertions like these are somehow posed as automatic axioms?

[sandwichwarrior.livejournal.com]

How the hell is that not obvious?

Let's say for the sake of argument that you're the government, and that I am someone who is about to be paid by you (the government). I could be a public employee, a contractor, or just some schmuck that qualified for some "stimulus", the specifics in this case don't really matter.

You pay me 20$

I give you 10% back in the form of income tax.

I then spend the remainder, you get 20% of that back in the form of sales taxes and other service fees.

How much money did you "make" in our transaction? Enough to break even?

[kylinrouge.livejournal.com]

Using austerity to deal with a recession is like trying to fix a car's gas leak by removing the tires.

[lafinjack.livejournal.com]

I'm behind on my bills, I better cut my hours.

[sandwichwarrior.livejournal.com]

More like, I'm behind on my mortgage, so I should to buy a 2nd house.

[lafinjack.livejournal.com]

I'm sure you feel that way.

[kylinrouge.livejournal.com]

More like they're building a 2nd house and then selling it for profit to pay off the 1st one's mortgage.