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Miracles come and gone, 2004

What had changed structurally was the growth of the welfare state and the sustained low unemployment rates that came with it. In a classic 1943 paper, Michal Kalecki explored the reasons why economic policymakers would never tolerate this situation for very long:

[U]nder a regime of permanent full employment, the "sack" would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension.

That would mean the loss of "discipline in the factories" and would put "political stability" at risk - which sounds a lot like the 1970s, from the factory floor to the global scene. It looked like a loss of discipline in the whole social factory.

That indiscipline was met with the rightwing ascendancy of the late 1970s, a massively successful campaign of wage cutting, union busting, and public sector austerity on a global scale.

The Smith/Klein/Kalecki theory of austerity,” May 16, 2013

Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence. This is pretty close to the argument that we must have austerity, because stimulus might remove the incentive for structural reform that, you guessed it, gives businesses the confidence they need before deigning to produce recovery.

EMU, 1998

Europe is now run by econocrats and central bankers, and it has become the most austere and most orthodox region of the world, with balanced budgets and hard money taking the front seat, and everything else either in the back seat or left behind entirely…. Europe is embracing a new, continent-wide form of money well before all the social structures to support it are fully in place…. In Europe, German industry sets the productivity pace and everyone else tries to keep up. In most cases, that has been a losing battle… But because of their commitment to monetary union, policymakers have done whatever was necessary to prop up their currencies against the mark…. [T]hat has meant excruciating austerity…. This austerity is supposed to have wondrously tonic effects over the longer term; weaker plants will be shut and businesses will go under, thereby boosting average productivity. It hasn't worked as advertised, and there are few historical instances where it ever has….

Nor does the ECB, with its minimalist charter to maintain price stability above all, have its financial emergency procedures worked out. The Fed regulates and supervises banks, and is prepared to throw money at a financial panic; the ECB has no explicit supervisory responsibilities, deferring apparently to national CBs, and its bailout plans aren't in evidence - even though EMU is virtually certain to cause great turbulence, as formerly protected national financial institutions face fresh competition. But the only words in the Maastricht Treaty devoted to bailouts - certainly a familiar and crucial aspect of modern financial life - are part of a prohibition: should any EU member country hit a wall, aid from the Union is expressly forbidden.

Old world, new crisis, 2010

But, financial details aside, there's also a fundamental economic problem on the Continent. As noted at the beginning of this piece, there's a wide disparity in incomes and productivity among the members of the eurozone. Average Greek, Italian, and Spanish incomes (measured by per capita GDP) were 10–15% below Germany's in recent years. Portugal was even further behind, about 35% below Germany. Underlying those gaps are big differentials in labor productivity—how much workers can produce in an hour of toil. If the peripheral countries were catching up with German productivity, tensions within the eurozone would be ebbing. But Germany is pulling further ahead of most of them. And it's not just productivity. Germany has kept a lid on real wages, meaning that pay levels are lagging productivity growth. As a result, German unit labor costs—how much workers have to be paid to produce a unit of output, which is a function both of productivity and pay—are falling. That of the peripheral countries is mostly rising. Or, to put it in word rather than numbers: there are few Mediterranean names that can rival Mercedes, SAP, or Siemens.

In the old days, meaning before the euro, countries under such competitive pressures could have devalued their currencies. Devaluations aren't painless—they raise the cost of imports and add to domestic inflationary pressures. Nor are they signs of economic vigor. Over the very long term…relative currency values are determined by relative productivity performance. That is, countries with productivity growth exceeding that of their trading partners tend to see the value of their currencies rise; productivity laggards tend to see declining currencies. And over the long term, that means that the laggards are getting poorer relative to the leaders. It's hard to find a historical example of a country devaluing its way to prosperity. Still, a devaluation can take the short-term pressure off—soften the effects of a currency crisis, stimulate exports, and reduce tendencies towards an austerity program as a "solution" to the problem. That outlet is now denied to Greece et al.

Instead, the Euro-elite, with Germany in the lead, is promoting a kind of devaluation through austerity: wages in the peripheral countries must be slashed, the assembly line speeded up, and fiscal policy massively tightened, meaning taxes raised and benefits cut. This is a conscious policy, not an accidental byproduct….


What ails Europe?,” February 26, 2012

So what does ail Europe? The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.

More specifically, the creation of the euro fostered a false sense of security among private investors, unleashing huge, unsustainable flows of capital into nations all around Europe's periphery. As a consequence of these inflows, costs and prices rose, manufacturing became uncompetitive, and nations that had roughly balanced trade in 1999 began running large trade deficits instead. Then the music stopped.

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don't, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt.

Wall Street, 1996:

[B]ehind the abstraction known as "the markets" lurks a set of institutions designed to maximize the wealth and power of the most privileged group of people in the world, the creditor–rentier class of the First World and their junior partners in the Third.

The Old Superstition, June 28, 2011

I was originally going to end this post by saying something about stupidity, but that's not right: the people at the BIS aren't stupid. What's going on here is something different and worse: we're seeing the desire for conventional respectability outweighing the lessons of history; we're seeing vague prejudice (prejudice that just so happens to serve the interests of rentiers) trumping analysis.

The Rentier Regime, June 8, 2011

Still, thinking of what's happening as the rule of rentiers, who are getting their interests served at the expense of the real economy, helps make sense of the situation.

Antisocial insecurity, 1998:

The Trustees of the Social Security System project economic growth over the next 75 years will be less than half that of the last 75 years…. Rerun the projections with more reasonable — though still conservative — projections and the "crisis" largely or fully disappears…. But let's take the 1.4% growth projection and apply it to the stock market, that cornucopia of wealth that's supposed to replace the public pension system. Privatizers typically assume an average real stock market return of 7% a year, from the combined increase in prices and the cash dividends. How the stock market is supposed to grow five times as fast as the economy is a mystery that's rarely noted, much less investigated. To achieve those stock returns, the ratio of stock prices to underlying corporate profits — price/earnings (P/E) ratios, a fundamental measure of whether stocks are "expensive" or "cheap" which goes out of fashion at enthusiastic times like these — would have to rise to astronomic levels.


Many unhappy returns, 2005:

The Social Security projections…assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years. In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade. The price-earnings ratio — the value of a company's stock, divided by its profits — is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it's about 20. Where would it have to go to yield a 6.5 percent rate of return? I asked Dean Baker… to help me out with that calculation…. Here's what we found: by 2050, the price-earnings ratio would have to rise to about 70. By 2060, it would have to be more than 100. In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble - and that stock prices will nonetheless keep on rising.


Rotting from the head, 2005:

For those of us who cut our teeth on the power-structure studies of William Domhoff, which saw the U.S. as ruled by an old WASP elite operating through institutions like the Ford Foundation and the Council on Foreign Relations, it's been quite a surprise to watch the Bush administration in action. Though it should have known better, it started a pointless war that's put U.S. power and prestige at severe risk, and it's driven the government's accounts deep into the red, and it's financed both reckless adventures with huge gobs of money borrowed from abroad. A serious ruling class might have reined them in long ago, but our elite has been too narcoticized by its tax cuts — your avearge millionaire got a $60,000 break, more than the pretax income of the average household — to complain. It's looking more and more like that elite shares many of the same characteristics often attributed to the couch-potato demographic: short-sightedness, political disengagement, distractability, and ignorance of the larger world....

The unwisdom of elites, 2011

What happened to the budget surplus the federal government had in 2000? Three main things. First, there were the Bush tax cuts, which added roughly $2 trillion to the national debt over the last decade. Second, there were the wars in Iraq and Afghanistan, which added an additional $1.1 trillion or so. And third was the Great Recession, which led both to a collapse in revenue and to a sharp rise in spending on unemployment insurance and other safety-net programs. So who was responsible for these budget busters? It wasn't the man in the street. President George W. Bush cut taxes in the service of his party's ideology, not in response to a groundswell of popular demand — and the bulk of the cuts went to a small, affluent minority. Similarly, Mr. Bush chose to invade Iraq because that was something he and his advisers wanted to do, not because Americans were clamoring for war against a regime that had nothing to do with 9/11. In fact, it took a highly deceptive sales campaign to get Americans to support the invasion…. So it was the bad judgment of the elite, not the greediness of the common man, that caused America's deficit.

How to learn nothing from crisis, 2010

To that pessimistic view of the "grass-roots," let me add a gloomy diagnosis of our elite. Our rulers have learned nothing from our brush with economic death. The initial response of both the Bush and Obama administrations has been to spend enormous wads of public money on trying to restore the status quo ante bustum. One would like to think that McCain lost the election in November 2008 because he represented that status quo — and that Barack Obama represented, if only in fantasy, a fresh departure. Those hopes have proved misplaced. There's been almost no effort to stiffen financial regulation to avoid future catastrophes.

The unwisdom of elites, 2011

Does any of this matter? Why should we be concerned about the effort to shift the blame for bad policies onto the general public? One answer is simple accountability. People who advocated budget-busting policies during the Bush years shouldn't be allowed to pass themselves off as deficit hawks; people who praised Ireland as a role model shouldn't be giving lectures on responsible government. But the larger answer, I'd argue, is that by making up stories about our current predicament that absolve the people who put us here there, we cut off any chance to learn from the crisis. We need to place the blame where it belongs, to chasten our policy elites. Otherwise, they'll do even more damage in the years ahead.

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