Why can’t Americans take the simple action to look across the ocean and see just how badly austerity devastates economies, and especially the poor, during economic downturns? Do we really want the same to happen here just to make President Obama look bad? Really? Because this is what you can expect if we keep cutting taxes for the rich instead of making them pay their fair share.
In case you’re one of those Americans who don’t pay attention to what’s going on elsewhere in the world and how it affects us here in the U.S., economic growth in Europe came in at a big fat zero in the second quarter of 2014. I suppose that’s better than being in recession, but it’s certainly not the growth that Europe needs with its huge unemployment rate of 12 percent (compared to the U.S. rate of 6.2%), or roughly 19,130,000 people out of work.
The euro zone has been in a depression since the Bush 2008 financial crisis with Spain’s 25% unemployment followed by Greece’s 19%, Cyprus’s 15%,Potugal’s 14%, Italy’s 12.6% and the rest of southern Europe leading the tailspin. That’s because in terms of gross domestic product, the euro zone has not even risen back to its pre-financial-crisis levels. The U.S., on the other hand, has gotten out of its slump and continues to grow at a relatively decent clip despite all the attempts by the Republicans to derail the growth lest President Obama enjoy any positive press.
But almost six years have passed since the fall of Lehman Brothers ushered in the worst economic crisis since the 1930s, and many people, myself included, would like to move on to other subjects. But we can’t, because the crisis is by no means over. Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression.
And as any real estate agent can tell you, when one house in the neighborhood is allowed to go to crap, all the other houses in the neighborhood lose their value too. As surely as Britain helped drag the U.S. into the Great Depression–in conjunction with Herbert Hoover, the last Republican administration to obsess over the country’s debt load–Europe could easily drag the U.S. into another.
With industrial production stagnant, mass unemployment still a problem, and inflation on a downward trend, economists such as The New York Times’s Paul Krugman worry that Europe is turning into Japan. The former second-largest economy in the world has spent more than 20 years in a deflationary depression, a spiral of falling prices which encourage people to sit on cash, causing prices to plunge even further. With its aging population, Europe has similar demographics to Japan; throw in the U.S. inaction–due to political gridlock of the conservatives steadfast block-and-blame-Obama–and conditions are worsening the likelihood that all of the above could happen and the entire western economic bloc could end up playing second-fiddle to the up and coming BRIC nations, who are quickly making deals to unseat the dollar as the world’s reserve currency. This move alone will cost the U.S. billions YEARLY in previously taken-for-granted revenue.
That will be bad, but it’s still a lot better than total collapse — which is what was widely feared in 2011 and 2012 when government interest rates rose drastically in countries like Italy, Spain, Greece, Ireland, and Portugal over fears about the sustainability of their sovereign debts. Under the euro, countries don’t control their own currencies, like we control ours, because they have to conform to a single fiscal policy, while instituting each of their own monetary policies… so they run a real risk of running out of money quite literally. The architects of the euro system, such as Romano Prodi, knew that this would be a problem but decided that they would cross that bridge when they came to it.
Well, we’re quickly approaching that bridge and it’s, ummm, structurally deficient, I say DEFICIENT, boy!
Since then, the European Central Bank (ECB) and the European Financial Stability Fund (EFSF) have been able to deploy various tools, including so-called outright monetary transactions, to backstop those governments and contain the sovereign debt crisis. Interest rates — even for countries like Spain, which two or three years ago looked in serious danger of default — are now as low as they are in the United States. Perhaps this episode illustrates that the euro was an incompetently designed currency, but the cleanup at least has been a major victory for the ECB.
But by this point it should be pretty clear that simply containing the sovereign debt crisis isn’t enough. The Federal Reserve under Ben Bernanke and Janet Yellen is proof that central banks can do much more to avert an economic depression and ensure a recovery. Central banks have tools like quantitative easing to fight unemployment and raise growth rates; notwithstanding the idiotic notions espoused by the ignorants who think our money supply literally means how many bills are in circulation. (The entire smoke-and-mirrors myth of supply and demand has been disproven in many previous essays on this site).
And although the ECB’s governor, Mario Draghi, has promised [incredibly] that the ECB can theoretically do more, he believes that — in spite of the low-growth, low-inflation, high-unemployment environment — the European recovery remains “on track” and is more worried about crises in the Middle East and Ukraine than the millions of unemployed people in Europe itself.
Of course, the ECB — unlike the Fed — is not required to strive to achieve low unemployment[what? You mean the Fed is not simply a tool for printing money?….<snork>]. It has a single mandate for price stability, which it defines as 2 percent inflation per year.
In the U.S., conservatives have warned relentlessly that the things governments and central banks are doing to limit the depth of the slump are setting the stage for something even worse. Deficit spending, they suggested, could provoke a Greek-style crisis any day now — “within two years“, declared Alan Simpson and Erskine Bowles some three and a half years ago. Asset purchases by the Federal Reserve would “risk currency debasement and inflation,” declared a who’s who of Republican economists, investors, and pundits in a 2010 open letter to Ben Bernanke.
To state the obvious, none of the predictions and warnings have come to pass, [much to FOX commentators’ chagrin]. America never experienced a Greek-type crisis of soaring borrowing costs. In fact, even within Europe the debt crisis largely faded away once the European Central Bank began doing its job as lender of last resort. And to put an exclamation point on the absurdity of lay-economists’ chicken little warnings about the evils of “printing more and more money”, inflation has stayed low. (Once again, and FOR THE RECORD, printing money, as it were, is NOT the same as making too much excess inventory leading to over-supply and thus, less value…that’s microeconomics(business/personal), not macroeconomics (governmental)).
And now growth has stalled, while inflation has fallen (you see, some inflation is good and spurs growth of wages and spending—both positive signs for capitalists–runaway inflation is what’s bad (and hasn’t been experienced since Carter stopped letting OPEC dictate the world’s oil prices–the short-term pain we had to endure in order to take away OPEC’s ability to affect our economy at will…although the GOP likes to point to that pain as some type of failure on Carter’s part, the truth is it’s the same type pain one must endure when a tourniquet is applied in order to save a leg ) far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. Mr. Draghi & Co. need to do whatever they can to try to turn things around, but given the political and institutional constraints they face, Europe will arguably be lucky if all it experiences is one lost decade.
And if the U.S. wants to avoid a similar situation (we didn’t start the austerity folly until after the 2010 mid-term GOP victories in the House), we’d better start stimulating some growth with wage increases and more aggressive infrastructure upgrading before we fall into the same roach motel in which Europe finds itself now residing.
Harvey A. Gold