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12-06-2012, 04:59 PM   #1
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As global growth slows, austerians demand more blood-letting

You know I have to do it.. Bad phrases redacted..
I’ve just returned from interesting conferences in Berlin and Helsinki. The first was a Levy Institute-Ford Foundation Minsky conference held at Deutsche Bank in Berlin on Debt, Deficits and Unstable Markets. (Hyman P. Minsky Conference on Financial Instability) It more-or-less followed the format of the long-running Levy-Minsky conferences held each April in New York. Unlike most academic conferences, these Minsky conferences actually include interesting presentations that touch on real world policy issues. One of the better presentations was by Vítor Constâncio, Vice President, European Central Bank, titled “Completing and Repairing the Economic and Monetary Union”. Yes, you read that right—a VP of the ECB. Apparently at least some at the ECB have finally recognized what is wrong with the set-up of the EMU. His assessment of the problems comes mighty close to what (that economic "theory" that shouldn't be named) have been saying for the past decade. His solutions are timid, but I suppose there are constraints on what he can say. Still, I recommend that you take a look at his talk (at the Levy site). I’ll draw on some of his points below.
However, that hope was dashed as I returned to the US and was inundated with media reports of the latest policy moves—from the UK to Ireland and to Germany, every government is calling for more blood-letting. Britain is planning to cut a million jobs from the public sector, and Chancellor of the Exchequer Osborne says austerity will continue through 2018! Remember that the global downturn began in 2008, so he’s planning to prolong the Great Recession to a 1930s style Great Depression length of at least a decade.

Here’s the logic: so far the cut-your-way to prosperity has generated only more suffering, so greater and more prolonged cuts will be needed to achieve the elusive prosperity. ( Yep, the patient is weakening, so we’ve got to drain more blood to restore health.

Over in Ireland, things are even more desperate. Since five rounds of blood-letting have failed so far to revive the patient, the government is imposing yet a sixth austerity plan. ( We know that those Irish are tough, but this is getting a bit ridiculous. The remedy to famine is now thought to be more famine.

And, finally, Chancellor Merkel has held out the hope of some consideration of debt relief for troubled member nations—but not before 2014 and only if they agree to impose more suffering on their starving people first. You see, the patient is not dead enough to stop the bleeding just yet.

(And not to be outdone, our own resident comedy relief team—University of Chicago economists—is demanding more suffering in the US. Not merely content with general statements about the need for austerity programs, Casey Mulligan is arguing that we need more poverty (“Poverty Rates Should Have Risen”, Casey B. Mulligan: Poverty Should Have Risen - . He insists that it is terrible, just terrible!, that poverty rates have not risen higher in the downturn. I, for one, wish we could find a way to let all the “Chicago Boys” experience some homelessness for a few weeks this January.)
EconoMonitor : Great Leap Forward

In Euroland, the Target 2 system accomplishes the same thing for national central banks: accounts clear. But here’s the problem. The little accounting elves keep track by national borders. They report that the naughty Greeks import more from the other member states than they export to them. Profligate consumers! Shame, shame. Tighten your belts!

Rather than creating one great big economy, the EMU was set up to foster competition among the member states to see who could export the most to neighbors. Germany won. How? Through painful deflationary policies to keep wages in check, assisted by the fortune of the fall of the Berlin Wall that brought in waves of low wage and high skilled East Germans to the labor force.

And so now Germany chastises the hapless Greeks, Italians, Spanish and Portuguese for losing the Hobbesian dog-eat-dog Mercantilist battle for internal export markets. The proposed solution is austerity everywhere. The inevitable outcome will be race-to-the-bottom dynamics to slash wages and living standards.

We’ve been there before. Remember the 1930’s? Made worse by trade policies such as the Smoot-Hawley Tariff Act of 1930. The EU has the Maastricht No-Growth and InStability Pact.

European leaders are seeking déjà vu all over again

Last edited by jeffkrol; 12-06-2012 at 05:18 PM.

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