Where Do the Troika, WSJ & NYT Think Deflation Comes From?

By William K. Black

If the troika (the European Commission, ECB, and IMF) taught sex education students would believe that storks brought children, that sex had nothing to do with pregnancy, that confident women never got pregnant, and that women should be forced to lose weight when they became pregnant.  The Wall Street Journal and the New York Times would repeat these myths as science. The NYT would employ one of the world’s top gynecologists (Dr. Krugman).  Dr. Krugman would debunk these myths nearly every week – and neither the troika nor the reporters for the NYT and the WSJ would ever listen to him.

The last several days have led to a flurry of WSJ and NYT stories about “deflation.”  I just posted critiques of some of the earlier stories here and here.

There’s only one of me, but the dual U.S. heralds of the troika employ dozens of scribes who faithfully proclaim its message without any intervening critical thought.  I’ve decided to make a bulk response to the scribes.

Three Central Defects

I offer this overall critique of the central defects of all these articles (and the troika’s policies).  Both of them fail to address three points.

  1. Where does the troika think deflation comes from?
  2. Given that the troika’s says that the key harm of deflation is reducing already inadequate demand, why is the troika insisting on inflicting austerity – which aggravates the inadequate demand?
  3. Why is their minimal discussion of the Great Depression levels of unemployment in Italy, Spain, and Greece and no discussion of the far superior alternative of using fiscal policy to speed the eurozone’s recovery?

Five Articles: No Coherent Analytics, Economics, or Humanity

Here, here, here, here and here are the links to the flurry of articles dated June 3, 2014, that I have not already discussed in prior columns.

Demand: Several Mentions; None Coherent

One article explains that core inflation is falling because:

“That reflects, above all, the high unemployment and debt burdens in much of the region, which are holding down wages, spending and demand.”

The quoted sentence is almost coherent.  It is true that high unemployment holds down demand.  “Spending” is “demand” so the scribe’s grasp of the concept is poor.  “Debt burdens” reverses the accurate analysis.  It refers to the long falsified claim of the austerians that if a government has debt it lacks the capacity to spend.  Austerity is what is causing already inadequate demand to weaken further.

Another article starts strong.  It begins by answering the question of where very low inflation and deflation comes from – inadequate demand.

“After a 5-year debt crisis, in a growing number of euro zone countries, businesses faced with slumping demand have been pressured to cut prices.”

The article continues by appropriately emphasizing the importance of demand, but failing to understand it.

“After years of a debt crisis, a number of countries in the euro zone are grappling with the effects of economic lethargy. At clothing stores, cellphone companies and factories making items as disparate as aluminum and tiles, owners faced with slumping demand have been pressured to cut their prices. In hard-hit countries, wages have also fallen sharply from precrisis levels.

Especially in the most fragile economies, the dynamic is crimping growth and dampening government efforts to pay down debt, regain competitiveness and tackle unemployment.

‘The big picture is that with low inflation, it is more difficult for debt to come down and for economic growth to come back, so you could have a period of stagnation,’ said Reza Moghadam, the director of the European department at the International Monetary Fund in Washington. He recently coined the term ‘lowflation’ to describe the euro zone’s dilemma.”

Again, the strength is explaining to the reader in the second sentence that the inadequate demand causes low inflation and deflation.  The next sentence correctly notes that wages have fallen sharply and that this further reduces demand.

Then things go horribly off the rails.  The obvious analytical points and policy advice that would arise from these admissions are (1) austerity is the problem and (2) fiscal stimulus is the solution.  Instead, the article careens incoherently as it must because it repeats faithfully the troika’s incoherence.  This sentence displays the logical inconsistency:  “[low inflation] is crimping growth and dampening government efforts to pay down debt, regain competitiveness, and tackle unemployment.”  Let us count the many problems packed into this single sentence.

  • The “dynamic” that gratuitously forced the Eurozone into a second recession – and Italy, Spain, and Greece into a Second Great Depression – was inadequate demand induced by the troika inflicting austerity.  Low inflation may add marginally to the inadequacy of demand by causing consumers to defer discretionary purchases, but low inflation and deflation are caused by inadequate demand.
  • “[D]ampening efforts to pay down government debt” would be a very good thing that would increase demand.  The “efforts to pay down government debt” are austerity.  Austerity is the disastrous policy because it decreases already inadequate demand.  The article starts by saying that inadequate demand is the problem, and then immediately loses the plot.
  • “Regain[ing] competitiveness” is the troika’s euphemism for slashing wages in the periphery.  Look at the quotation again – it is found one sentence after correctly noting that one of the important contributors to reducing demand further was the fact that “wages have also fallen sharply from precrisis levels.”  The troika and the Nation’s leading financial papers cannot maintain logical consistency in adjacent sentences.  The troika’s bleeding of the economy and workers is a major contributor to the slashing of wages that has made consumer demand so inadequate.

The last paragraph quoted above about “stagnation” again misses the fact that inadequate demand causes both high unemployment and low inflation.  It also fails to note that because of the austerity-induced second Great Recession the eurozone suffered years of rising unemployment even when inflation was higher.

The article then veers back and presents a logical view – with no indication that the scribe understands the logical inconsistency.

“‘Inflation is so low,’ said Simon Tilford, deputy director of the Center for European Reform in London, ‘because wages have fallen sharply and consumer demand and investment have been depressed.’”

The final article that uses the word “demand” states:

“Deflation, spurred by falling wages and depressed consumer demand, hits borrowers by raising the real value of loans, and has the potential to weaken Europe’s fragile financial sector.”

“Raising the real value of loans” could make a recession more difficult to recover from, but it is far down in the ranks of potential contributors.  The far more important, and straightforward, point is that deflation and severe recessions have the same cause – grossly inadequate demand.

Even this article, which is by far the best of the five, is incoherent.

“Adding to the pressure [on the ECB to act], a separate report showed the European labor market continuing to stagnate.”

Note that the journalist acts as if the obscene level of eurozone unemployment is created by some unrelated (and unidentified) factor instead of inadequate demand.

Austerity: One Inept Mention

The best article notes that unemployment is at Great Depression levels in Spain and Greece and provides the only mention of “austerity.”

“The job market has been hammered by the euro zone debt crisis, which ushered in an era of fiscal austerity and, some economists argue, an insufficiently loose monetary policy by the European Central Bank.”

But note that even the best article gets it completely wrong.  The “job market” was not “hammered by the euro zone debt crisis.”  The eurozone job market was “hammered” first by the Great Recession and then by the troika inflicting austerity, which made already inadequate demand far more inadequate.  The largely faux eurozone“debt crisis” did not “usher[] in an era of fiscal austerity.”  The troika forced fiscal austerity in conditions we have known for at least 75 years would prove self-destructive.  The article, which is by far the best of the five articles, fails to even consider ending the bleeding the economy through austerity.

The NYT’s “Draghi as Physician” Simile

The most embarrassing of the five articles begins with this sentence.

“Mario Draghi might feel like a doctor trying to treat a chronically ill patient with unproven medicines.”

There are three vital things that are totally wrong about that sentence.  First, it was the ECB and its fellow troika members that forced the eurozone – as it was beginning to recover from the Great Recession – back into a gratuitous second recession and in several cases a Second Great Depression by inflicting austerity.  Second, the correct medical metaphor would be that Draghi is continuing to insist on “bleeding” the patient a century after we knew that the practice had no scientific basic and harmed the patient.  His practices were not “unproven” – they were known to be quackery.  Third, to the extent the focus is on low inflation, Draghi has been refusing to “treat” the “chronically ill patient” even though (A) the eurozone has repeatedly failed to meet the ECB’s stated inflation target and (B) there are proven fiscal means of curing the “patient” which Draghi fights to prevent from being used.  

Conclusion

The troika and our leading financial papers admit that very low inflation levels are caused by inadequate demand and that they are harmful because they could further reduce that already inadequate demand.  The troika and the papers, however, find it impossible to recognize that the troika’s policies – austerity and forcing large wage reductions – are self-destructive because they further reduce demand.  The troika and the papers, therefore, refuse to even discuss the ready alternative of reversing the troika’s self-destructive policies.

The WSJ scribes have obvious institutional difficulties in writing honestly about the folly of austerity.  The NYT scribes continue to perplex.  The great majority of economists think the troika’s austerity policies are self-destructive.  The NYT has a Nobel Laureate who has spent years explaining this point.  The NYT scribes do not simply get the story wrong.  Their deflation coverage rarely presents the views of scholars who make the argument against austerity.  The papers do not cite Paul Krugman on the issue or the many other economists who have a far more successful predictive record than do the troika trolls.  It remains a de facto job requirement that WSJ and NYT scribes writing about the EU austerity crisis check their critical faculties curbside.

 

5 responses to “Where Do the Troika, WSJ & NYT Think Deflation Comes From?

  1. Europe is domed; there is no Light at the end of the tunnel. A short age of Enlightenment in Europe is now all over. Cretins once again rule the continent and another era of dark middle ages is the new reality – in the Confidence Fairy we believe – despite some remains of logic and common sense. Compared to Barroso, Rehn, Draghi, Lagarde, Merkel and so on the Papal rule of Inquisition seems like a period of humanity and reason.

  2. Jerry Hamrick

    Your light never dims.

    How do you manage to produce so much excellent output?

  3. Boosting demand is not the Troika (or the Fed) goal. They can use bolstered, militarized police forces to quell popular dissent, so a population with failing incomes and defaulting on its debt is obviously not their concern.

    It appears their priority is to ensure large institutions and super-wealthy individuals do not begin a default spiral.

  4. Professor Black,
    You can continue to make a living pointing out the destructive flaws in the establishment’s policies, but if a Nobel laureate like Krugman with a byline in the Gray Lady can’t change squat, where does that leave everyone else?

    The fact is that things aren’t screwed up for the 1% (or .1% of the 1%), the folks who now control the levers of power that drive all meaningful economic decisions. In fact, things couldn’t be better for our non benevolent overlords, and they’re getting better with each passing day. This is their golden era, the age they’ve been striving (and paying big bucks) for four decades. We are living the Infamous Powell Memo, and our non benevolent overlords rejoice and reach for more.

    I love your work and believe your voice is important, but aiming your pea shooter at the daily tactics of the ongoing assault on America’s working classes gets us nowhere. It’s like criticizing the individual at bats of baseball players while ignoring the strategies of the management that put them on the field.

    I suppose the establishment will tolerate your nit picking as long as it doesn’t change anything. And as long as you’re nit picking, that means that nothing meaningful will change. When you really hit money it will be difficult to find a Bill Black byline.

  5. (slightly off topic)
    I was watching the Colbert Report the other night and one of the catch phrases he likes to use is the rich are ‘job creators’. That is only partially true. Consumers are the real job creators. I wish more people understood that. They are the ones who create the demand that creates jobs and growth. Any effort by a government and corporations that reduces their ability to spend will harm the economy. The problem I see with the 1% is that they have mostly spent all they are going to spend on houses, cars, etc. What is left over sits in a bank account somewhere and driving more money into those accounts is parasitic and harms society.