Paul Krugman is fretting that the Organization for Economic Cooperation and Development is listening to the “Pain Caucus“, since it is recommending austerity measures.
Not to worry Mr. Krugman, Team Profligacy is on the case!
Europe is eager to begin paying down sovereign debt. The US wants to see Germany and France continue stimulus measures. (…)
Washington is concerned that, should Europe overreach in its rush to cut government spending, it could endanger the fragile economic recovery that has taken hold on the Continent and around the globe. In particular, the US would like to see countries like Germany and France continue efforts to stimulate their economies.
During a stop in London on Wednesday, Geithner held discussions with his British counterpart George Osborne. According to a report in the Wall Street Journal, Geithner underlined the dangers should Europe turn away from fiscal stimulus.
Christina Romer, who heads up the White House Council of Economic Advisers and who was with Geithner in London on Wednesday, said that European countries should be wary of cutting spending too quickly. “There is a certain amount of rush for the exits on fiscal policy,” she told reporters. The US is hoping that stimulus-fueled growth will ultimately result in higher tax revenues which can then be used to pay down debt.
Paul Volcker, former chairman of the US Federal Reserve and an economic adviser to US President Barack Obama, also argued recently that Europe should focus on encouraging growth rather than cutting spending. Referring specifically to France and Germany, he said in an interview with Bloomberg radio earlier this month that “it would help a lot if the rest of Europe, the strong part of Europe … if they have more growth, that will help these countries on the periphery.”
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A Country whose currency is the world’s reserve can probably spend all it likes with a degree of impunity – its exchange rate wont be so quick to fall thru the floor, there will still be buyers of its govt debt.
I really don’t think Obama/Geithner can expect the same committment to deficit, reflationary policies of smaller countries like GB where continued high spending and borrowing will end up destroying its currency. To my mind the Special Relationship goes so far.
As for the Euro itself, it lacks the fiscal unity that is necessary for a currency union to survive once it gets into monetary crisis. In such a circumstance Obama’s policy prescription would result in the break-up of the Euro.
Unlike their predecessors, the new British government isn’t /quite/ that stupid.
Hans Hoppe in his lectures on monetary imperialism ephasized that it is in the interest of the issuer of the world’s reserve currency to push for simultaneous and coordinated inflation by all the central banks. If European monetary policy was less inflationary than US policy, the Euro might be preferred as a reserve currency to the dollar. So the US government could use its influence over credit rating agencies to warn against sovereign default in the eurozone, when the situation is as bad in the US. UK is not a threat to the success of the Federal Reserve’s inflationary policies, but Geithner must try to push European countries towards more inflation byt this kind of propaganda.
Mr Krugman needs not to worry. Nobody is going to cut government spending around here. People are so addicted to government opiates that will tolerate everything (and I really mean everything) to keep getting their fix.
The only area of conflict I see in the future is rating: Europe is fuming over US rating agencies “downgrading” Greek, Portuguese and Spanish bonds. They fail to understand that while US agencies will obviously treat them with favor (Spanish bonds weren’t degraded as much as they deserved for example) they are there to do US banks’ and government’s interests first, not the EU’s. Think of a servant who has always thought of himself of an equal but wakes up one morning to discover he’s only a lackey and you get the picture.
But in the end nothing will change.
In truth whether the approach is “stimulus” or austerity Europe implode.
If Europe “stimulates,” as the Obama team desires, then we may see the crash delayed a little only to fall from a higher plateau. If Europe institutes sever austerity without fundamental changes in the structure of the economy, privatization of economic elements that the government has socialized, you will simply have a decline in production, services, purchasing power, general decline, and increased social unrest.
The only real solution is the supply side solution, growth, but that will only come with government divesting itself of the services it has nationalized and cutting the taxes and regulations that prevent the private sector from producing a recovery.
The sad things is that I am hearing “growth” as the solution from many but those calling for it have no idea how to create conditions for it to happen. It will not happen with quantitative easing.
Every so often, it’s good to remember that the Luddites were not so much wrong as early. Today, free traders boast that the US can compete because we have “the most productive workers” in the world. You bet. One guy pushing one button to run a factory is a very productive SOB. So what?
We may not run out of things to do that machines can’t do for us, but without manufacturing jobs, we don’t need as large a private economy as we once did. Government must pick up the slack as the customer of last resort for our human resources. They can all work for private contractors, but the spending must come from public works. Fortunately, our roads, bridges, air-traffic systems, aqueducts, and power grids provide a bottomless pit of value-adding employment if we can just figure out how to put our unemployed people to work rebuilding them.
One thing we could do is put all infrastructure spending off budget. That’s not “smoke and mirrors.” Capital improvements add to equity, not liabilities. In the real world, even ignoring the important multiplier effect of spending on income tax revenues, the capital improvements will reduce the cost of everything that moves over the improved infrastructure, counterbalancing the inflationary effect of the new money that would be printed to pay for them.
Triffin’s dilemma says that the issuer of the world’s reserve currency has to run a trade deficit so that dollars will go abroad. At a certain point, however, interest on the existing Federal debt can increase the supply of dollars, and we can move away from a trade deficit position. We would need to get off oil and impose tariffs to achieve that goal, things that are very hard to do politically. Instead, we can let the trade deficit ride for as long as China wants to provide us with cheap labor and put our people to work improving the distribution network for all those imports.
The big news may be that the Fed can no longer raise interest rates to control inflation. If the Government owes enough short-term money, raising interest rates will raise the deficit, which will weaken the currency. Accordingly, the Fed may be stuck lending short to the Government for a very very long time. Then we will see whether Mark M is right when he says that we can spend with impunity. I certainly see how that may be the case, but if it is, we should get to it and stick to it. Let’s fund some of those massive infrastructure projects that everyone says we cannot afford, even though the resources to do them are sitting are punding the pavement looking for work. These thing need to be done. I only hope that our politicians do not resist these projects for fear of appearing to admit that we’re in a depression. Because that may be just what we need to put us in one.
“Capital improvements add to equity, not liabilities.”
Governments do not make capital improvements intended to lift the overall economy, they create porkbarrel projects in order to win the next election and to line the pockets of their friends and family. That is why you get bridges to nowhere in certain places, while bridges which are critically needed fall down.
Henry – Can you say “Interstate Highway System”? The infrastructure is a mess. If the Government doesn’t fix it, who will? Yeah, there’ll be waste, abuse, and fraud. But that’s hardly a reason not to make the skies safe and the power flow.
Dr. Walter Block recommends the privatisation of highways, bridges and roads.
Do you think he’s right? Where would private companies get the necessary capital? Would they get the power of eminent domain? Or is he just talking about selling the existing infrastructure? I don’t think privatization of existing stuff works, but I don’t feel strongly about it either way. Building new stuff, though, seems to me something only the government can do.
Weren’t many of the original turnpikes in the US privately created?
Dr. Block is totally opposed to eminent domain. As to the necessary capital, it could be trivial depending on the length of road or highway.
*facepalm*
Seriously? How many times does this have to be explained to people?
At least one more time, apparently, as I don’t even know what “this” is.
“This” is the idea that the amount of unmet human needs is less than the amount of labor available to solve them, especially in light of further mechanization displacing human labor.
The first fallacy is that there is a finite amount of unmet human needs, when in actuality, they are infinite. Right now for example, I need to mow my lawn, but I also need to clean out the garage. What is scarce here isn’t my needs, but the amount of labor I have available to accomplish them, or the amount of wealth I have to spare to pay someone else to do them.
The second fallacy is the classic Luddite position that machines destroy human productivity, when in the real world, they free up labor for more valuable uses, which as noted above, are infinite in demand. While a buggy-whip maker may not transition to a career as a physicist, they can still find some other human need they can provide value toward, allowing someone else the opportunity to take that route.
I didn’t say we had run out of things to do. I said that we would not be able to employ ourselves in manufacturing and so should do something else, namely work on our infrastructure, a human need and a higher use of a skilled worker’s time than mowing your lawn.
We have not been put out of work by technology in the Luddite sense; we have been put out of labor-intensive manufacturing by cheap labor in far away places – places that used to be too far away to matter but which technology has now made close enough to compete with us. The only labor-intensive industries in which we can compete with foreign workers are construction, which can only be done by local workers (with foreign steel and pre-fabricated components, of course) and health care. That’s the fallacy of the anti-Luddite argument: we cannot move workers from buggy whips to something else, not because there is no something else, but because the Chinese (et al.) can do whatever that is more cheaply than we can. The only manufacturing we can do is capital-intensive, which is fine, but by definition does not employ a lot of people.
My argument about the infrastructure is opportunistic, not pessimistic or socialistic. We have an unprecedented opportunity to get our house in order – lots of workers, cheap money, and access to foreign consumables. If not now, the when?
And yes, my recollection is that the original turnpikes were private. I guess that didn’t work out…
Without inflation, prices would have been dropping the past century. If this is the case, wouldn’t we only need to work let’s say 20 hrs a week instead of 40 to provide for ourselves. Therefore doubling the number of jobs? Increases in productivity should result in more leisure time I would think.
Walt – Working fewer hours wastes the capital invested in training workers, disrupts the continuity of one worker doing one job, etc. There are unskilled jobs that can be shared, but anything that takes skill, training, or knowledge of what happened in the shop four hours ago, just can’t be shared practically. And anyway, there’s so much to be done in the way of public works, it would be nuts to “occupy” all of our human resources with part-time jobs.
Lemme explain something to you real quick-like.
If the demand for road repair, bridge building, etc. rose (due to a desire for roads and bridges) then the price offered for these types of work in the form of wages will rise. Due to the rise in wages, this will attract more workers to the position, thus satisfying the demand. The “problem” you’re describing only becomes relevant when the state centrally plans the labor markets in these areas (which it does to an extent right now.)
Secondly, if there is no demand for bridges and roads and everyone only works 6 hours a week, what’s the problem with this? All production is aimed ultimately toward satisfying desires for consumption. Production which does not satisfy any demand is a wasteful activity. We produce so that we may consume, not the other way around. Make-work projects like you describe only divert resources away from more productive activities.
Your scenario applies when there is already near full employment. Today’s unemployed construction workers would take infrastructure jobs for the same pay they would be getting for private work, if there were private work. Less, even.
As for everyone working six hours a week, you’d have to explain how that would come to pass. How many employers do you know would want 100 employees who work six hours a week when they could have 15 who work 40? Only the government could enforce such inefficiency, and that’s exactly the sort of central planning you seem to dislike.
But enough. I can see that I have stumbled on yet another site where people go to be smugly wrong together. Meanness seems to be a preerequisite for membership here. I didn’t insult anyone, and yet I get “facepalm,” “Seriously?”, “Lemme explain something to you quicklike” (as if you had a clue), and of course Craig’s clever-as-hell “um, theory” and “Thought so.” To see inane, dogmatic drivel wrapped in such self-satisfied snot is actually amusing to us grown-ups. But arguing with people who peaked, intellectually and emotionally, in middle school gets old fast, so I’ll be leaving now. Anyone who wants to follow up will find relevant posts at my blog, but be forewarned: comments are moderated, and it’s adults only.
Kramer has a point here. This section used to be “post a civil and useful comment” I believe.With people like Mr Kramer who disagree so obviously from the beginning, with Misesean macro-economical analysis, it should be recommended perhaps to only answer very briefly and very clearly as not to shock them.Stating one argument at a time but thoroughly and why not, politely… a bit like Mr Tucker does brings about a discourse more pleasant to read for the future visitor of the blog.
“They can all work for private contractors, but the spending must come from public works. Fortunately, our roads, bridges, air-traffic systems, aqueducts, and power grids provide a bottomless pit of value-adding employment if we can just figure out how to put our unemployed people to work rebuilding them.”
In your, um, theory, where does the money come from that the government spends?
Thought so. It has to come from the people who worked in the private sector. Are there no negative effects resulting from taking it away from them?
Infrastructure projects are financed by borrowing and paid for by the value added. Money is always only a detail. If we need the work done, and doing it does not crowd out commercial activity, the borrowing will not be inflationary. We’re a long, long way from having too many dollars to chase all the goods Asia can produce.
Oh Mr Krugman, don’t worry about that, government spending is not going down any time soon, people around here seem as ignorant about it as they are there. Changing money between the hands of the state and private state supported useless monopolies is a common practice in Europe, but still no one seems to be concerned with paying taxes that end up paying the unproductive debt.
“God forbids” if the USA ever comes to be the only country in which the public debt problem is not solved.
Paul Krugman is to economics as Bill Kristol is to foreign policy — someone whose professional fortunes have correlated inversely with the accuracy of his predictions and the correctness of his ideas. In this regard, both men are analogous to the government itself, which grows richer and more powerful with every failure.
I noticed this comment about something Obama recently said regarding the oil spill. If only he’d have applied the same approach to the financial mess:
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