Not Seeing The Trees For The Forest
Paul Krugman’s analysis of the European Debt Crisis, in this morning’s New York Times, should be required reading — not just for the movers and shakers in Europe, but for our own so called wise men. Krugman’s critics on the right accuse him of fiscal hysteria. But his analysis is clear eyed and, therefore, gloomy:
Think of it this way: private demand in the debtor countries has plunged with the end of the debt-financed boom. Meanwhile, public-sector spending is also being sharply reduced by austerity programs. So where are jobs and growth supposed to come from? The answer has to be exports, mainly to other European countries.
But exports can’t boom if creditor countries are also implementing austerity policies, quite possibly pushing Europe as a whole back into recession.
Krugman has never argued that debt is not a problem. But he continues to maintain that it is a longer term problem. What is more important — in the short term — is stimulating economic growth, creating jobs, and improving government tax receipts.
For those who believe that debt is about to overwhelm us, all of this is counter intuitive — just as John Maynard Keynes’ solution for The Great Depression was counter intuitive. And, therefore, Krugman’s conclusion that, “there is a very wide gap between what the euro needs to survive and what European leaders are willing to do, or even talk about doing” is spot on.
That same conclusion applies to David Cameron’s remedy for his country’s problems. Cameron was in Ottawa last week, praising Canada for advocating the same policies. Meanwhile, Jim Flaherty has the gall to lecture the Europeans on their lack of fiscal virtue. And Stephen Harper goes on American television, claiming that Canada is a light to the world.
Such incredible and wrongheaded arrogance is more than embarrassing. It’s folly — because our elites cannot see the trees for the forest.
Owen Gray grew up in Montreal, where he received a B. A. from Concordia University. After crossing the border and completing a Master’s degree at the University of North Carolina, he returned to Canada, married, raised a family and taught high school for 32 years. Now retired, he lives — with his wife and youngest son — on the northern shores of Lake Ontario. This post is cross posted from his blog.
3 Responses to “Not Seeing The Trees For The Forest”
The problem with economics is that it has no room in itself for one of Kant’s moral imperatives; the need to punish people who behave irresponsibly or to prevent people from getting away with gaining from their own irresponsible behavior even if it means sacrificing the well being of society as a whole.
It is vitally important that the European community bails out Greece to support the euro. But there is such a strong desire to punish Greece for their profligate behavior that most seem willing to let Greece sink even if it drags the entire economic community down with it. The moral imperative overrules economic good sense.
It is similar to the United States refusing to bailout the homeowners caught underwater on their mortgages when it would have stopped the economic downturn and shortened the recession at a much lower cost than we are paying now. The fear that someone would get away with something they didn’t deserve paralyzed us and prevented us from helping ourselves.
To economists this self-defeating behavior can’t be fit into any theory, it can’t be understood. It is, see own foot, shoot own foot, repeat, stopping only to wonder why the foot hurts.
It certainly seems to be cart-before-horse to worry about debt now while we’re in the midst of economic catastrophe.
HOWEVER, there is significant evidence pointing to debt as a reason for this recession. Things such as this (from here: http://blogs.reuters.com/great-debate/2011/09/26/global-action-for-global-recovery/)
Basically, many banks are still recovering from the housing crisis and are exposed to potential European defaults, and are therefore afraid to lend more. Lending leads to investment & job growth, especially for small businesses, hence the economy is still frozen.
It’s hard to convince folks to lend when their own asset base is precarious. Everyone retreats when threatened (well, most everyone, at any rate).
@Barky
Yes, debt is the common denominator. Many countries, including the Fed in the US, used low interest rates to encourage development, somehow thinking there would never be any consequences. Of course, low interest rates are still their favored weapon, because there’s really not much that can be done when everyone is trying to deleverage at the same time.