With the ascent of a recently elected leftist government, Greece now has a bit of a mandate to turn back the savage austerity cuts imposed on it by other European powers; principally, Germany, the continent's largest economy. Investors worldwide are scared about the "Grexit," or Greece's exit from the Eurozone," because it might lead to a self-reinforcing, negative feedback loop in the form of a massive sell-off. As I'm often prone to do, I brought up current events at an inopportune time. It was 11:00 pm the other night, I was just returning from a walk, and saw my neighbor and his partner. My neighbor was having a good time and was visibly inebriated. Because my neighbor's partner was from Europe (Slovakia in fact), I remarked how "mean" I thought Germany was being to Greece. I had been following the news these past few years and my own sense of the situation was that Germany was forcing Greece and other countries in southern Europe to enact massive cutbacks in government spending as a condition for European Union bailout money. She then launched into a small tirade about how "lazy" the Greeks were; how they don't pay taxes, etc. I remarked how yes, I had heard about corruption and the lack of paying taxes, but that this was overdrawn. I should have added that "lazy" Greeks was probably just as accurate of a stereotype as "lazy" African Americans in the United States. But my point was that this was only part of the problem; that we shouldn't cut government spending during a recession. The Roosevelt recession of 1937-38 and this current recession have made that clear. When FDR listened to the wrong people, went back to financial orthodoxy and tried to balance the budget before the economy recovered, there was another recession. GDP growth turned south and unemployment went back up. As most reputable economists agree, austerity, in study after study, had actually proved counterproductive and had made Greece suffer a lot more than was necessary.
Her response was that she had some claim to higher authority because she was actually European and that I had only been to Europe once in 2000. So??!! Does that necessarily prove her right? Just because I'm American, does this mean that I automatically have a better perspective on what ails America compared to a British or Scottish scholar? Her partner (my neighbor) chimed that he was an economics "professor"; sorry, he corrected himself...an economics "major" and had spent 20-30 years in business. Okay, I thought. So you got an undergraduate degree in economics in the 1970s. Have you done graduate work in the field? Have you kept up with how the field has changed since then? His position was that Greece needed to balance its budget just as a company needed to balance its budget. Oh gosh, here we go again...this sounds good on the surface but actually makes for bad economics. It is the same old morality tale, based on little to no evidence, but repeated over and over ad nauseam. The Greeks had sinned. They needed to clean up their act. The Germans were the responsible lenders.
I had to stop the conversation - the other neighbor would have gotten mad, it was probably pointless because it was an informal conversation, and they were drinking, and most would argue that the conversation was pointless anyway. What irked me a lot about this conversation, however, was that it flew in the face in everything I had learned about the economy in the past few years; that the perspective was seemingly "wise" and "serious" but based on very little empirical data. My neighbor at least was college educated but seemed to lack a basic understanding of how spending works in an economy. In other words, austerity had had enough time to take root and there was plenty of evidence to test whether it had worked. And the jury's out. For the past few years, Greece, Spain, and other countries that experienced a housing boom have been on the brink of depression because of German-imposed austerity. They've dealt with double and even triple-dip recessions. I mentioned the housing boom to these folks and they didn't seem to know what I was talking about. Lots of people have come out blaming proponents of austerity for moving too quickly to cutting spending without properly addressing employment. Not all of them are progressive. All the apocalyptic predictions of "currency debasement" and "runaway inflation" never came to pass, either in the US or in the Eurozone. Not even close actually. If anything, the problem was deflation - something central banks are supposed to avoid at all costs. So if certain people are wrong time and time again, why should we keep listening to them? This is what we should be saying about all the neo-cons who lied us into the Iraq war.
The bottom line is that all of the "serious" economic analysts started obsessing about debt and deficits, rather than focusing on consumption, spending, employment, and peoples' well-being. This was a major mistake with catastrophic consequences for the people of Europe. Spain's youth unemployment has been close to 50%. Greece has been in the midst of a depression. Its economy has shrank over 20%. People are committing suicide. Oh, but they have a balanced budget!!! The "serious" economic analysts always assume a position of moral superiority by saying that it's immoral to be a deadbeat borrower. But the best economists turn this thinking on its head: it's even more immoral to have long-term unemployment. Those who are in the long-term unemployed suffer major psychological trauma and in many respects, never recover for years, if at all.
Even back in 2013, it was clear that austerity was acting in a counterproductive manner. Rather than lowering Greece's debt-to-GDP ratio, austerity seemed to make this figure go up. This makes sense. If you cut spending, people will have less money in their pockets to spend, pay taxes, and this means less money is coming into governments, and voila... budget deficits actually go up. In 2012, before Mario Draghi agreed to some quantitative easing, people were really worried about interest rates on sovereign debt reaching a point of no return where Italy, Spain, and Greece would have debts that were truly insurmountable.
Europe has experienced the Great Recession a lot more painfully than the US. They seemed to have taken the wrong lessons from history. Just because Germany had a bad experience with inflation in the 1920s, they're now determined to make everyone else suffer. More and more evidence comes in about how their current programs have backfired and yet they refuse to relent. I really have a hard time taking anyone seriously - whether it be my neighbors' supposed claims to "expertise" or those in charge of the European Union - who stick to ideology in spite of measurable, quantifiable evidence to the contrary. Narrowing Greece's problems down to a "lazy" people is easy. It's facile. But the reality is more complex. And austerity has not lived up to its promises of greater prosperity. Not even close. So where is the accountability, other than France electing a socialist prime minister? On the monetary side, a major part of the US recovery has been the success of our central bank, the Federal Reserve, in buying hundreds of billions of dollars of US Treasury bonds, mortgage-backed securities, and other assets. Unemployment never got above 11% in the U.S. But Europe, on the other hand, has lots of problems on its hands. It has a single currency with a loose amalgam of different countries, histories, languages, customs, religions, and work practices (even the culture of work is much different in southern Italy compared to northern Italy). Anyway, it's long past time that we stop listening to the proponents of austerity who have been wrong on just about everything. The problem is that they keep getting elected to power. The larger lesson people need to realize is that balanced budgets are not the end-all-be-all in and of themselves. What good is a balanced budget if it doesn't lead to prosperity?
Her response was that she had some claim to higher authority because she was actually European and that I had only been to Europe once in 2000. So??!! Does that necessarily prove her right? Just because I'm American, does this mean that I automatically have a better perspective on what ails America compared to a British or Scottish scholar? Her partner (my neighbor) chimed that he was an economics "professor"; sorry, he corrected himself...an economics "major" and had spent 20-30 years in business. Okay, I thought. So you got an undergraduate degree in economics in the 1970s. Have you done graduate work in the field? Have you kept up with how the field has changed since then? His position was that Greece needed to balance its budget just as a company needed to balance its budget. Oh gosh, here we go again...this sounds good on the surface but actually makes for bad economics. It is the same old morality tale, based on little to no evidence, but repeated over and over ad nauseam. The Greeks had sinned. They needed to clean up their act. The Germans were the responsible lenders.
I had to stop the conversation - the other neighbor would have gotten mad, it was probably pointless because it was an informal conversation, and they were drinking, and most would argue that the conversation was pointless anyway. What irked me a lot about this conversation, however, was that it flew in the face in everything I had learned about the economy in the past few years; that the perspective was seemingly "wise" and "serious" but based on very little empirical data. My neighbor at least was college educated but seemed to lack a basic understanding of how spending works in an economy. In other words, austerity had had enough time to take root and there was plenty of evidence to test whether it had worked. And the jury's out. For the past few years, Greece, Spain, and other countries that experienced a housing boom have been on the brink of depression because of German-imposed austerity. They've dealt with double and even triple-dip recessions. I mentioned the housing boom to these folks and they didn't seem to know what I was talking about. Lots of people have come out blaming proponents of austerity for moving too quickly to cutting spending without properly addressing employment. Not all of them are progressive. All the apocalyptic predictions of "currency debasement" and "runaway inflation" never came to pass, either in the US or in the Eurozone. Not even close actually. If anything, the problem was deflation - something central banks are supposed to avoid at all costs. So if certain people are wrong time and time again, why should we keep listening to them? This is what we should be saying about all the neo-cons who lied us into the Iraq war.
The bottom line is that all of the "serious" economic analysts started obsessing about debt and deficits, rather than focusing on consumption, spending, employment, and peoples' well-being. This was a major mistake with catastrophic consequences for the people of Europe. Spain's youth unemployment has been close to 50%. Greece has been in the midst of a depression. Its economy has shrank over 20%. People are committing suicide. Oh, but they have a balanced budget!!! The "serious" economic analysts always assume a position of moral superiority by saying that it's immoral to be a deadbeat borrower. But the best economists turn this thinking on its head: it's even more immoral to have long-term unemployment. Those who are in the long-term unemployed suffer major psychological trauma and in many respects, never recover for years, if at all.
Even back in 2013, it was clear that austerity was acting in a counterproductive manner. Rather than lowering Greece's debt-to-GDP ratio, austerity seemed to make this figure go up. This makes sense. If you cut spending, people will have less money in their pockets to spend, pay taxes, and this means less money is coming into governments, and voila... budget deficits actually go up. In 2012, before Mario Draghi agreed to some quantitative easing, people were really worried about interest rates on sovereign debt reaching a point of no return where Italy, Spain, and Greece would have debts that were truly insurmountable.
Europe has experienced the Great Recession a lot more painfully than the US. They seemed to have taken the wrong lessons from history. Just because Germany had a bad experience with inflation in the 1920s, they're now determined to make everyone else suffer. More and more evidence comes in about how their current programs have backfired and yet they refuse to relent. I really have a hard time taking anyone seriously - whether it be my neighbors' supposed claims to "expertise" or those in charge of the European Union - who stick to ideology in spite of measurable, quantifiable evidence to the contrary. Narrowing Greece's problems down to a "lazy" people is easy. It's facile. But the reality is more complex. And austerity has not lived up to its promises of greater prosperity. Not even close. So where is the accountability, other than France electing a socialist prime minister? On the monetary side, a major part of the US recovery has been the success of our central bank, the Federal Reserve, in buying hundreds of billions of dollars of US Treasury bonds, mortgage-backed securities, and other assets. Unemployment never got above 11% in the U.S. But Europe, on the other hand, has lots of problems on its hands. It has a single currency with a loose amalgam of different countries, histories, languages, customs, religions, and work practices (even the culture of work is much different in southern Italy compared to northern Italy). Anyway, it's long past time that we stop listening to the proponents of austerity who have been wrong on just about everything. The problem is that they keep getting elected to power. The larger lesson people need to realize is that balanced budgets are not the end-all-be-all in and of themselves. What good is a balanced budget if it doesn't lead to prosperity?