April 20th, 2013
in Op Ed
by William K. Black, New Economic Perspectives
The two most revealing sentences about the gratuitous Eurozone disaster – the creation of the deepening über-Depression – was reported today. The context (rich in irony as I will explain) is that U.S. Treasury Secretary Lew spent his Spring Break in Europe meeting with his counterparts. The Wall Street Journal’s article’s title explains Lew’s mission and its failure:
“U.S. Anti-Austerity Push Gets Cool Reception in Europe.”
Here are the sentences that capture so well why Germany’s destructive economic policies caused the über-Depression -
Mr. Schäuble said,
"Nobody in Europe sees this contradiction between fiscal policy consolidation and growth. We have a growth-friendly process of consolidation.”
Wolfgang Schäuble is Germany’s finance minister. “Fiscal consolidation” is his euphemism for austerity. “Austerity” is an infamous word to tens of millions of Europeans. “Growth-friendly” is his euphemism for causing the über-Depression. I have explained in a recent column that current unemployment rates in the European periphery are often multiples of the average unemployment rates in large European nations from 1930-1938. Current unemployment rates in the U.K. and France are broadly comparable to their average unemployment rates in 1930-1938.
Schäuble’s economic policies (austerity) have proven catastrophic. They are contrary to everything we have learned in economics. In my April 9, 2013 column criticizing the New York Times’ coverage of the self-destructive austerity the EU and the IMF inflicted on Cyprus I quoted Paul Krugman’s devastating criticism of the EU austerians’ dishonest response to their failures and the massive misery they have inflicted.
“Thus in January 2011 Olli Rehn, a vice president of the European Commission, praised the austerity programs of Greece, Spain and Portugal and predicted that the Greek program in particular would yield ‘lasting returns.’ Since then unemployment has soared in all three countries — but sure enough, in December 2012 Mr. Rehn published an op-ed article with the headline ‘Europe must stay the austerity course.’
Oh, and Mr. Rehn’s response to studies showing that the adverse effects of austerity are much bigger than expected was to send a letter to finance minsters and the I.M.F. declaring that such studies were harmful, because they were threatening to erode confidence.”
Schäuble’s claims about austerity repeat two of the great lies that are driving the über-Depression: (1) austerity in response to the Great Recession stimulates economic growth and (2) everyone agrees this is true. The third great lie is that “there is no alternative” to austerity.
Economists have known for at least 75 years that austerity is likely to make economic contractions more severe. The eurozone’s infliction of austerity has produced precisely the self-inflicted damage that economists predicted. The European leaders who caused this wholly gratuitous economic disaster, unsurprisingly, will not admit or remedy their errors.
But America has its own variant of this insanity and Lew is one of our most self-destructive austerians. Like Schäuble, Lew is a lawyer. As Obama’s OMB Director, Lew prepared a budget and a rationale for that budget that was an ode to austerity. I demonstrated this in detail in a prior column.
Lew was also one the group of Obama aides noted for their protection of Wall Street’s interests who led the effort to inflict austerity and begin to unravel the safety net through what they called the “Grand Bargain” (actually, the Great Betrayal).
Obama’s decision to send Lew, the great proponent of self-destructive austerity, to Europe to urge them to end their self-destructive austerity exemplifies the incoherence of the administration’s financial policies. The fact that Obama is simultaneously proposing the Great Betrayal – its sixth form of austerity that Obama has agreed to inflict on our Nation since 2011 – produces a level of incoherence, incompetence, and hypocrisy so epic that it is likely to cause economists to act like manic depressives bouncing between wild-eyed gales of laughter and crying jags.
Putting two lawyers together to discuss macroeconomic policy also leads to discussions that cause economists’ jaws to drop in shock. If you understand economics you may wish to put on a neck brace before reading the next passage lest its incoherence cause whiplash.
“Standing next to Mr. Schäuble, Mr. Lew said pointedly that deficit reduction needed to be balanced with growth and investment policies. While growth targets may be different for different countries, he said, ‘I think it is fair to say that zero isn’t a good target for anybody and negative is very bad.’”
“Growth targets” are meaningless in this context. You cannot counteract austerity dragging your economy deeper into recession or depression by saying: “we are targeting a growth rate of four percent.” There is no magic incantation that can remove austerity’s destructive effect. A country cannot “balance” austerity with “growth and investment policies.” Austerity is an anti-growth policy. It frequently makes the debt-to-GDP ratio larger because it causes such a large fall in GDP. Krugman explained this in the same article I cited above.
“Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing.”
Investment programs can be very helpful in conjunction with overall stimulus budgets, but they cannot counteract austerity. This has been one of Obama’s recurrent blind spots. He seems to believe that if he can implement a new $2 billion infrastructure investment or jobs program that can overcome the damage to the economy caused by austerity in the form of a combined $300 billion in reduced spending and increased tax revenues. The net effect is $288 billion in lost demand due to austerity. This slows growth. If the austerity is large enough it causes growth to turn negative and throws the Nation back into recession or depression. We may know why Obama has this blind spot about the damage he is inflicting through austerity – he gets his advice from Lew.