REAL WORLD EVENT DISCUSSIONS

Lessons for the US from Europe debacle

POSTED BY: KPO
UPDATED: Thursday, May 10, 2012 05:08
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Monday, May 7, 2012 9:13 AM

KPO

Sometimes you own the libs. Sometimes, the libs own you.


Ezra Klein sums it up very well:

Quote:

Europe is a mess. But it’s a peculiar mess that both the left and the right think validates everything they’ve been saying about what we should -- and shouldn’t -- do here in the U.S.

“The right argues we have to cut deficits now or we’ll be like Greece,” says Tom Gallagher, a principal at the Scowcroft Group. “The left argues we can’t cut deficits now or we’ll be like Europe.”

So, who’s right? Well, which entity do you think is more comparable to the U.S.? Greece? Europe? Neither?

I come down somewhere between “Europe” and “neither,” but it’s worth going through each contestant in turn.

Greece is a country of 11 million. Geographically, it’s about the size of Louisiana. It doesn’t control its own currency, and its government spent years lying about its fiscal condition. After it joined the euro area in 2001, Greece went from paying about 7 percent interest on a 10-year bond to a bit more than 3 percent because investors assumed that its debt was backed by Germany and the European Central Bank. This encouraged profligacy (which led to the dishonesty) in Athens.

The assumption also turned out to be wrong. When investors figured that out, they turned on Greece. Hard. With easy money no longer masking its problems, Greece’s economy was exposed for the mess it is. The World Economic Forum ranks it as the 90th most competitive country in the world, between Lebanon and El Salvador.

Safest of Safe
The U.S., by contrast, is a country of 313 million. It controls its own currency, which is also the global reserve currency. The U.S. Treasury bond is the safest of safe assets. Even after a lengthy financial crisis, the World Economic Forum ranks the U.S. as the fifth most competitive economy in the world, and it’s bigger than the first four combined. Whatever the U.S. is, it’s not Greece.

So perhaps it’s Europe? Or at least the euro area? After all, the euro area is also big and controls its own currency. Likewise, the euro area was once considered a safe bet.

But the euro area is also a fledgling institution facing an existential crisis. No one knows whether it will be around in its current form in 10 more years -- or even 10 more months. Its central bank seems more committed to forcing member countries to cut their deficits and reform their labor markets than to preserving the currency union itself.

The crisis has also exposed deep flaws in the basic structure of the alliance. The member countries increasingly despise and mistrust one another. Critical players in the drama -- France and Greece -- are on the verge of electing new governments that promise to radically renegotiate the terms of euro-area compacts. Meanwhile, Germany and the ECB seem determined to impose a moralistic, debt-focused narrative on a crisis that’s better understood as a problem of capital flows and growth.

The U.S. has its problems. Although we can borrow for next to nothing and unemployment remains above 8 percent, U.S. leaders often seem more focused on debts than growth. The political system is increasingly gridlocked and dysfunctional. One of our two major parties is engulfed in a civil war driven by an insurgency that wants to radically redefine government functions, preferring, for instance, to default on the national debt rather than increase tax revenue or borrow more. It’s a pretty safe bet, though, that the country itself will still be around, in much the same form, in a decade. Where the euro area’s lack of policy consensus threatens to tear the currency union apart -- a threat markets take seriously -- the U.S. poses no similar risk of suicide (which the markets know, too).

Established Entities
A better analogy is found in the U.K. Like the U.S., the U.K. has been around awhile and it isn’t going anywhere soon. Like the U.S., the U.K. has established institutions -- the Bank of England was founded in 1694 -- that have been tested before. But unlike the U.S., the U.K. responded to the financial crisis with a quick turn toward austerity, imposed through tax increases and spending cuts, rather than Keynesian stimulus. As a result, the U.K. is falling into a double-dip recession, even underperforming its rate of recovery during the Great Depression. What’s more, with the economy sinking, austerity measures aren’t producing the desired fiscal balance. Economic health depends on the nation’s debt-to-GDP ratio: When GDP falls, as is happening in the U.K., debt must fall even further and faster to make up the difference.

The smaller, more open U.K. economy is also more buffeted by events in the euro area than the U.S. is. But as Gallagher, of the Scowcroft Group, says: “You never get perfect comparisons. You’re always approximating. The 1930s in the U.S. and the 1990s in Japan aren’t perfect examples either, but we use them to draw lessons.”

What lessons should we draw? Don’t be like Greece -- that’s the easy one. The more important lesson of the euro area is that a successful currency union should also be a fiscal and political union. The U.S. has little to learn on that score. As for the U.K., well, it’s more about relearning a lesson that some in our country seem to have forgotten: Austerity does not create growth, and it’s not something you want to try prematurely.

In a recent paper, economists Ugo Panizza and Andrea Presbitero analyzed the evidence that high levels of debt hinder a nation’s economic performance. They failed to find proof of a causal link. What did seem clear, they wrote, is that high debt can reduce growth “because high debt leads to panic and contractionary policies.” That’s essentially what’s happened in the U.K. We would be wise not to let it happen here.




http://www.bloomberg.com/news/2012-05-02/europe-debacle-is-full-of-les
sons-but-which-are-true-.html

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Monday, May 7, 2012 10:06 AM

PIZMOBEACH

... fully loaded, safety off...


Quote:


Critical players in the drama -- France and Greece -- are on the verge of electing new governments that promise to radically renegotiate the terms of euro-area compacts.



Imagine that potential any time a member country has an election??

Quote:

In a recent paper, economists Ugo Panizza and Andrea Presbitero analyzed the evidence that high levels of debt hinder a nation’s economic performance. They failed to find proof of a causal link. What did seem clear, they wrote, is that high debt can reduce growth “because high debt leads to panic and contractionary policies.” That’s essentially what’s happened in the U.K. We would be wise not to let it happen here.


So is that a recommendation to reduce debt then through austerity? Because I can't imagine how our flighty country can avoid being panicked or writing contradictory policies in the face of high debt even when the facts show we shouldn't. [ /snark ]



Scifi movie music + Firefly dialogue clips, 24 hours a day - http://www.scifiradio.com

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Monday, May 7, 2012 12:03 PM

KPO

Sometimes you own the libs. Sometimes, the libs own you.


Quote:

In a recent paper, economists Ugo Panizza and Andrea Presbitero analyzed the evidence that high levels of debt hinder a nation’s economic performance. They failed to find proof of a causal link. What did seem clear, they wrote, is that high debt can reduce growth “because high debt leads to panic and contractionary policies.” That’s essentially what’s happened in the U.K.

I found that paragraph interesting as well. Debt is more manageable than people think. Or should I say 'feel' - as the arguments for harsh austerity seem to be based more on people's moral outrage than practical, objective consideration of what is the best, least painful way of tackling the debt problem.

It's not personal. It's just war.

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Monday, May 7, 2012 1:04 PM

FREMDFIRMA


I can sum it up better, and quicker.

THERE IS NO ELEVENTH MARBLE!

-F

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Tuesday, May 8, 2012 3:13 AM

NIKI2

Gettin' old, but still a hippie at heart...


Quote:

“because high debt leads to panic and contractionary policies.”
Isn't that what's happening--or "trying to happen"--here already? Our debt is too high, unquestionably in my opinion, and the Republicans have been pushing "contractionary policies" for quite some time now. Those policies have caused unemployment (laying off government workers, unionized workers), slower economic recovery (lack of revenue, minimum stimulus), and changes in government that increase the "contraction" (Tea Pary). Seems to me we're well on our way (to a lesser degree) to doing what other countries have done...and if Romney wins, we'll REALLY see a contraction! I agree with Pizmo:
Quote:

So is that a recommendation to reduce debt then through austerity? Because I can't imagine how our flighty country can avoid being panicked or writing contradictory policies in the face of high debt even when the facts show we shouldn't.


Problem is, how do we get this reactionary party to agree to revenue, but at the same time be sure the revenue isn't spent on GSA conventions, etc., and STARTS paying down the debt? If the economy grows, doesn't that make a better debt-to-GDP? Seems he's saying "prematurely", as in the UK turned to austerity too quickly, or something. I don't understand this stuff well, obviously--surely he's not suggesting we work on JUST revenue for a while first; I don't think that would work either. Very confusing. The one thing I get out of it is that austerity hasn't worked for anyone else; but what's the viable alternative...and if there is one, and it's just stimulus, how in HELL do we achieve that with an obstructionist party bent on austerity and nothing else?



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Tuesday, May 8, 2012 1:48 PM

KPO

Sometimes you own the libs. Sometimes, the libs own you.


Quote:

I don't understand this stuff well, obviously--surely he's not suggesting we work on JUST revenue for a while first; I don't think that would work either.

Well raising taxes is a form of austerity, first of all - it puts a squeeze on the economy just like cutting government spending. I think Ezra Klein's suggestion is in line with the IMF's reccomendation to the US - that it avoids too much austerity too fast. Reducing debts and deficits is much easier once you have an economy up and on its feet (past success stories are Belgium, and Canada in the 90s). But forcing harsh austerity on an ailing economy may hurt in the long term as well as the short term (large numbers of people being long-term unemployed, and their skills going to waste), and may even in the end prove self-defeating.

Quote:

but what's the viable alternative...and if there is one, and it's just stimulus, how in HELL do we achieve that with an obstructionist party bent on austerity and nothing else?

I think the answer is more stimulus - infrastructure projects etc. Since the US can borrow money at next to nothing at the moment (despite all past right-wing predictions to the contrary), I'd say it's a no brainer. As for how that might happen, I guess Obama would have to win by a significant margin in November... But I also have a hunch that Romney, if he gets in, would create a stimulus bill of his own... He's not stupid, and I heard today he has a couple of Keynesian economists amongst his advisers.

Here's Krugman on the issue:



It's not personal. It's just war.

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Tuesday, May 8, 2012 3:24 PM

NIKI2

Gettin' old, but still a hippie at heart...


Quote:

Reducing debts and deficits is much easier once you have an economy up and on its feet
Yeah, that's kind of what I got out of it...and I've been muttering "infrastructure" under my breath when I hear things on TV for ages now. it's the "how" that depresses me.
Quote:

I think the answer is more stimulus - infrastructure projects etc. Since the US can borrow money at next to nothing at the moment (despite all past right-wing predictions to the contrary), I'd say it's a no brainer.
I just don't see that happening, even if Obama got a strong majority (which I doubt); as long as you've got an obstructionist Congress AND a Senate with less than a 60-seat majority (and all 60 Senators willing to go along), it's already been shown that you CAN'T get anything done...at this point, LEAST of all any kind of stimulus!

Once I was forced to recognize that the Republicans WANT the economy to stay bad or get worse in the hopes it would win them power, I can't but think they'll go right on that way in the hopes it will get them power in the NEXT election...I see no viable reason for them to stop, it's worked all too well.

If Romney won, where would he get the backing for a stimulus? Certainly tax hikes would be out of the question, so the only other option is more cuts...which would be bad, yes? I just don't see it happening. More likely I see, were he to win, things getting far worse for four years, then the Repubs being tossed out...AGAIN (just to prove we didn't learn anything the first time...or the second...) and someone having to clean up their mess, if that would even be possible by then!

I guess I just don't see much hope for the future...



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Tuesday, May 8, 2012 3:40 PM

NIKI2

Gettin' old, but still a hippie at heart...


The Krugman link didn't work, but I copied and pasted it. Very interesting, I WISH our righties would bother to take the time to watch it (which of course I know they won't) and were capable of actually DEBATING what they heard sensibly. To me it all comes down to a couple of things he said:

The first was that the Democrats want a mix of cutting spending and raising taxes; the Republicans want a mix of cutting spending and LOWERING taxes. That kinda puts things in perspective.

The second was that we're kind of like midieval doctors who bled the patient, then when the patient got worse, bled them MORE. Excellent analogy.

I was also struck by what he said about unemployment being THE biggie, that the damage it does to the long-term unemployed and to the prospects of the young entering the market.

The ONLY answer I can find for this is the Republicans WANTING things to get worse. Does that mean they'd turn around and go the other way once IN power, or is there a component of them either wanting to get what they can while the gettin's good and to hell with everyone else (once in power) or actually BELIEVING cuts and lower taxes would WORK? One is morally repugnant as hell to me--but we've seen it happen with individuals (CEOs, etc.), so it's not out of the question (especially given they worked to make things worse in order to gain power in the first place); the other is just plain insane, to me.

I didn't get as far as the part about Romney potentially doing a stimulus if he wins the Presidency; I'm pooped and it's time to eat. But I'll try to get through the whole thing later, because to me he seemed to be talking so much SENSE...even "common sense" if you will, given the examples we have in front of us overseas.

I guess I'm still pretty depressed about the future, all things considered...



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Thursday, May 10, 2012 4:22 AM

KPO

Sometimes you own the libs. Sometimes, the libs own you.


Quote:

If Romney won, where would he get the backing for a stimulus?

If Romney introduces a stimulus don't worry, Republicans will vote for it (some, at least). Repubs aren't ideologically opposed to stimulus so much as they are ideologically opposed to stimulus proposed by Obama. And even if Obama gets re-elected who knows? A lot of Republicans whose primary motivation this past 4 years has been to try and make sure he doesn't get re-elected, if stripped of this incentive, might actually start thinking about the country again.

It's not personal. It's just war.

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Thursday, May 10, 2012 4:23 AM

KPO

Sometimes you own the libs. Sometimes, the libs own you.


This is an interesting spectrum of economists views on the 'austerity vs growth' debate:

http://www.bbc.co.uk/news/business-18008446

It's not personal. It's just war.

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Thursday, May 10, 2012 5:08 AM

STORYMARK


Quote:

Originally posted by kpo:
Quote:

If Romney won, where would he get the backing for a stimulus?

If Romney introduces a stimulus don't worry, Republicans will vote for it (some, at least). Repubs aren't ideologically opposed to stimulus so much as they are ideologically opposed to stimulus proposed by Obama. And even if Obama gets re-elected who knows? A lot of Republicans whose primary motivation this past 4 years has been to try and make sure he doesn't get re-elected, if stripped of this incentive, might actually start thinking about the country again.

It's not personal. It's just war.



Yeah, Republicans only object to defecits when its a Democrat in charge. If they get the WH again, it'll be back to the "Deficits don't matter" mindset - all whiule expanding Government and intruding on civil liberties.

"Goram it kid, let's frak this thing and go home! Engage!"

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