By William K. Black
Bloomington, MN: January 7, 2015
The troika (the EU Commission, the ECB, and the IMF) are flirting with throwing the entire eurozone back into a third Great Recession and much of the periphery into the continuation of the Troika Depression. For nations like Greece, the current Great Depression is now more severe and longer lasting than the Great Depression of the 1930s. The New York Times and the Wall Street Journal’s journalistic malpractice in covering the troika’s gratuitous infliction of misery upon the people of Europe has been the perfect side dish to complement the troika’s toxic economic malpractice.
Both papers are aflutter today with news that the Eurozone fell into deflation. We have been trying for months to explain that there is nothing magic about the harm caused by deflation (as opposed to very low levels of inflation). We have also been trying to explain for years that the steadily declining rate of (already inadequate) eurozone inflation is most important as a symptom rather than a cause of the harm resulting from the troika’s infliction of austerity.
The key fact to understand, which the troika, the WSJ, and the NYT have obscured for six years, is that if inflation were to rise from one percent to four percent in the course of a recovery from a recession that would be excellent economic news because it would spur growth. If inflation were to fall from one percent to one-half percent that would be terrible economic news. Well before the inflation rate becomes negative (deflation), material falls in the (already too low) inflation rate indicate that demand is seriously inadequate and that the economic recovery can be improved by fiscal stimulus. The fall in inflation is one of the symptoms that the demand is inadequate. The fall in inflation is also a problem – long before deflation – because it can further weaken the already inadequate demand for goods and services.
This means that it is critical for nations (and the troika) to act vigorously when an economy is weak and underperforming. The government must act long before deflation sets in to provide the inadequate demand and not allow the inflation rate to continue to fall. The stated rationale for the ECB and the Federal Reserve’s inflation targets reflects the facts that I have just explained. The ECB, therefore, should have been acting vigorously two years ago to restore demand under its own written standards. Instead, as I have explained, Mario Draghi, the ECB head, dithered and even claimed that rapidly falling inflation that was approaching deflation was actually a (quack) cure that would spur recovery. Draghi has now changed his tune, but not his dithering.
The NYT Reaches a Belated Epiphany about Demand for Goods and Serices
In fairness to the NYT, its story on deflation marks a sea change in one major arena. The NYT now concedes that “the eurozone’s fundamental problem — [is] a dearth of demand from businesses and consumers for goods and services.” It only took six years for the NYT, which bills itself as the Nation’s best paper, to rediscover basic macroeconomics known for 75 years. As I just explained in an article about the writer who is the WSJ’s “Chief European Commentator,” the WSJ continues to deceive its readers about the facts of the eurozone crises, economics theory, and economic experience. Relative to the WSJ, the NYT has finally shown real progress.
The NYT still falls into the trap of believing that deflation (as opposed to very low inflation) is somehow a magic threshold where damage to the economy suddenly increases. At the beginning of the article this statement is made as if it were an undisputed fact.
“When deflation takes root, consumers tend to delay purchases because they expect prices to fall further. Corporate profits sag, and companies are forced to dismiss workers. Deflation also raises the cost of servicing loans in real terms, putting stress on borrowers and their lenders.”
Well before “deflation takes root” very low inflation begins to cause the problems described by the NYT. The reality is a continuum. Persistent, significant levels of deflation are more destructive than very low but still positively low levels of inflation. We should never allow an economy to get close to deflation. It is beneficial to intervene with effective fiscal policy well before deflation arrives.
The NYT article is internally inconsistent on this point. Near the end of the article they get it right, but even then they treat the inconsistent statement as simply the view of one party (albeit a member of the troika).
“Well before eurozone consumer prices tipped below zero, the region’s low inflation rate had been raising alarms.
Economists with the International Monetary Fund warned early last year that the difference between ultralow inflation, which they called lowflation, and outright deflation was mainly a matter of degrees, as the weak price pressures could ‘scupper the nascent recovery and pressure the most fragile countries.’”
The IMF, among the world’s most rabid inflation hawks, finally made this concession in 2014. “Well before” the IMF admitted the point, it was a broadly held view among economists.
In the context of a pathetic “recovery” from a gratuitous Second Great Recession and the continued Troika Depression, significantly higher inflation in the eurozone would not simply be non-harmful it would be highly beneficial. The NYT article begins with a passage that is written in a manner that leads readers to believe that the choice facing the Eurozone is between two evils – hyper-inflation and deflation: “the classical definition of deflation — a widespread, protracted and self-sustaining decline. The condition may be even more debilitating than runaway inflation because it is difficult to reverse.” But there is no such choice in the eurozone’s context. Significantly higher inflation rates (e.g., 4%) would be highly beneficial to Europe in this context.
The Troika Depression
The NYT also, albeit after six years, put in print what we have been saying for years – the unemployment rates in the periphery are at or beyond Great Depression levels.
“[I]n the second- and third-largest of the eurozone economies, France and Italy, the jobless rates climbed, with Italian unemployment reaching a new high of 13.4 percent.
And in Greece and Spain, about one-quarter of the population remains without work, a level consistent with economic depression.”
Three supplementary facts are important. Italy’s 13.4% unemployment rate is a Great Depression level – and it is rising. The Troika Depression in Italy, Spain, and Greece has lasted longer than the Great Depression in some of those nations. One hundred million Europeans – one-third of the eurozone’s total population – live in these three countries. The fact that the Germans insist that the troika treat such a catastrophe as acceptable – and the willingness of the troika to agree to inflict these cruel and economically illiterate German diktats upon the people of the periphery – is a disgrace.
The NYT Mentions EU Fiscal Policy
The NYT finally also mentioned fiscal policy and pointed out that monetary policy is typically ineffective in the circumstances of the eurozone. While both points are obvious ones taught in the first semester of economics and six years is a long time to ignore such obvious points and the critics pointing out the NYT’s glaring errors, the NYT is still far ahead of the WSJ.
“The central bank has an official goal of trying to keep inflation at just below 2 percent — which it considers an optimal level for a healthy economy. But the bank has not met that target in two years.
Japan’s experience in the ’90s showed that traditional monetary policy instruments are largely ineffective with nominal interest rates at zero, as they essentially are now in the eurozone.
Another way to address the problem might be for eurozone countries to drop their insistence on balancing budgets and to instead use tax cuts and public spending to create demand.”
The quoted passage could certainly be improved. Explaining why “inflation at just below 2 percent” was considered “optimal” by the ECB – even when the eurozone economy is vibrant – would have aided the reader greatly. It would have required the NYT to explain why low levels of inflation are not simply “not harmful,” they are actually helpful. Had the NYT explained why even the ECB – one of the world’s looniest inflation hawks – considered inflation in the two percent range “optimal” would have required the NYT to explain the harm that very low levels of inflation cause well before deflation occurs.
Explaining why the ECB had failed – for two years – to meet that inflation target – would have been of great benefit to the readers. The troika is so dedicated to the faith-based economic malpractice of austerity that it has consistently violated its own standards on maintaining adequate inflation. The troika’s refusal to follow its own rules has led the eurozone recovery to stall and caused immense, gratuitous harm to the people of Europe. It has also created, gratuitously, a material risk that the eurozne will sink back into a third Great Recession and that the Troika Depression will continue in much of the periphery.
Yes, monetary policy is typically ineffective in these circumstances, but that is not because interest rates are “at zero.” Raising interest rates would not make monetary policy effective. The obvious, well understood policy response to a problem of insufficient private sector demand is to provide public sector demand to fill the gap. Fiscal policy is not “another way to address the problem” of insufficient demand – it is the proven way to do so. The related obvious response to mass unemployment is to have the public sector provide a jobs guarantee (another example of fiscal policy).
The NYT Still Accepts a German Fable as Unquestioned Fact
The most disappointing aspect of the NYT article is treating the following German claim as if it were fact rather than fiction.
“Jörg Krämer, chief economist at Commerzbank in Frankfurt, on Wednesday defended the German view, saying that the danger was being overstated in light of the debt overload that was behind the global and European financial crisis that developed in 2008.”
“Debt overload” was not “behind the global and European financial crisis that developed in 2008.” The global and financial crisis was a problem of massively overstated asset values that were often concentrated in a few systemically dangerous institutions (SDIs) that also took on off the charts liquidity risk through suicidal leverage ratios. Much of this massive overvaluation and extreme leverage occurred because doing so maximized the “sure thing” guaranteed to make the CEOs of the SDIs that led the three most destructive epidemics of accounting control fraud in history immensely wealthy. The German story of “debt overload” as the cause of a global crisis is a fable.
Warts and all, however, the NYT’s belated admissions about the folly of austerity and the need for fiscal stimulus have to be applauded as substantial progress from an embarrassing six years of shilling for austerity and largely ignoring the human misery caused by its recurrent failures.
The WSJ’s Treatment of Deflation
The WSJ article begins with this clunker. “Inflation has been below 0.5% since July 2014, threatening the ECB’s credibility in achieving its objective of price stability.” As the NYT correctly explained, eurozone inflation has been below the ECB’s target for two years and it has been falling. The ECB has had zero “credibility” for years with regard to its rules on inflation. The WSJ article indirectly admits this later in the piece when it concedes that central banks consider inflation near 2% as “optimal.”
The WSJ Ignores Fiscal Policy
The WSJ article becomes embarrassing in this disingenuous passage.
“But the euro bloc is struggling to find the building blocks for a more vibrant, jobs-rich recovery that would boost prices. Europe faces high unemployment in much of the region, weak business investment and geopolitical uncertainties. In contrast, inflation rates in the U.S. and U.K. are closer to the 2% rate that central bankers consider optimal.”
The euro block is not “struggling to find the building blocks for a more vibrant, jobs-rich recovery that would boost prices.” We have known for at least 75 years how to produce that recovery through fiscal policy. The troika, however, due to German diktats is not permitted to employ the fiscal policies that would have long since ended the crisis. Unlike the NYT’s recognition that eurozone unemployment remains at Great Recession and beyond Great Derpession levels in much of periphery, the WSJ’s indifference to the catastrophe caused by austerity remains stony. The reader learns only that “Europe faces high unemployment.”
The WSJ Misses Draghi’s Logical Contradictions
The WSJ did, indirectly, admit that the reason why central banks considered 2% inflation “optimal” was that long before deflation sets in very low rates of inflation can further reduce already inadequate demand.
“‘If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending,’ ECB President Mario Draghi warned in a newspaper interview published last week.”
What the WSJ neglects to point out is that eurozone inflation has already remained too low under the ECB’s own standards “for a long time” (two years and no one expects this to end soon). Draghi has not only refused to enforce the ECB’s rules but even claimed that exceptionally low inflation rates are desirable. Under Draghi’s own logic his actions are irresponsible.
The Germans Force European Workers to Act Like Financial Gladiators
The WSJ article ends on this telling, and distressing point.
“Weakness in German inflation, which was just 0.1% last month on an annual basis, also makes it harder for its eurozone neighbors to rebalance their economies. To gain competitiveness vis-à-vis Germany, Spain, France and others must run inflation rates well below Germany’s. When inflation is near zero in the bloc’s biggest economy, others in Europe face pressure for more dramatic price and wage cuts.”
The WSJ’s answer to economic recovery is for Eurozone nations to “rebalance their economies” by “winning” a race to the bottom via “dramatic price and wage cuts” in which the prize of increased exports goes to the single nation that makes the most “dramatic price and wage cuts.” Think, unlike the WSJ, in both economic and moral terms about the implications of Germany and the troika forcing the people of Europe to engage in such a brutal race to the bottom. Note first, however why this dynamic is such an elegant solution from the German perspective – Germany uses the troika to do the dirty work of compelling European workers to enter the Coliseum and slaughter each other’s wages in a brutal financial competition while Prime Minister Angela Merkel’s wealthy financial and manufacturing supporters thunderously applaud the results. Merkel takes particular delight when German diktats force leftist heads of state to betray the workers by forcing “dramatic … wage cuts.” This, of course, discredits the parties that once represented the workers.
Economically, forcing “dramatic … wage cuts” on the workers of France and the periphery during the Troika Depression constitutes malpractice. Consumer demand is already inadequate, so cutting wages does not simply force prices down to levels that are increasingly harmful because they delay consumer purchases, it also directly reduces consumer demand because it forces “dramatic cuts” in workers’ wages. It is also a strategy in which the workers in the single nation that “wins” the race to the bottom are the “biggest losers.” The losers in the race to the bottom (we can’t all be next exporters) are double losers. They suffer “dramatic” drops in wages and already inadequate demand and they don’t end up with the “competitive advantage” of being the biggest (wage) loser. I stress that there are real winners in such a continental race to the bottom of workers’ wages, and they are not the workers. The real winners are the CEOs of the largest companies and their crony politicians. As the Super Computer realizes in the film Wargames, the only way to win such a race to the bottom game is to refuse to play.
Morally, the WSJ’s gladiatorial scheme – a “modest proposal” that Swift would have enjoyed had it been intentional parody – reveals that the once proudly independent news staff of that paper has been fully Murdoched. I don’t think that they even realize how depraved their plan is to set worker against worker in a German Götterdämmerung.
I hereby volunteer the WSJ’s senior staff and Murdoch to lead the way with “dramatic cuts” in their incomes. They might even discover empathy for workers.