By William K. Black
(Cross-posted from Benzinga.com)
The Wall Street Journal recently printed an economically incoherent and dishonest discussion of Spain’s budget deficit. It begins its discussion with these paragraphs.
“Spain’s central government reported a new deterioration in its finances and struggled to impose budget discipline on the country’s restive regions as data showed a surge in capital flight from the euro zone’s fourth-largest economy.
The central government in Madrid said it had a budget deficit equal to 4.04% of gross domestic product in the first half, up from 2.2% a year earlier, as tax revenue remained weak and Madrid moved to extend emergency support to the country’s financially ailing regional and municipal governments.”
Twelve paragraphs later, the article finally informs the reader about unemployment.
“Spain’s economy continues to deteriorate. Unemployment figures for the second quarter of 2012, released last week, showed the jobless rate reached a record high of 24.6%, the highest in the developed world, and the government recently warned that the country’s economic contraction would drag through next year. Seasonally adjusted retail sales, an indicator of consumer confidence, fell 5.2% on the year in June, compared with a 4.9% yearly drop in May, Spain’s National Statistics Institute said Tuesday.”
The fact that the two subjects are intrinsically linked appears to have escaped our nation’s most famous financial newspaper. Instead, they treat the following claim by the Spanish government as if it were a fact rather than an assertion falsified by the events recounted in the WSJ article.
“Government officials also expressed confidence that new austerity measures pushed through in July—valued at a total of €65 billion over the next 2½ years—will help ensure the government meets its [budget deficit reduction] targets.”
Austerity can never “ensure” meeting a budget target. Austerity means some combination of raising revenues and reducing expenditures. A severe recession produces large budget deficits by causing an enormous drop in tax revenues and a material increase in spending, e.g., in payments to the unemployed who are unable to find work. As the 25% unemployment rate demonstrates, Spain is in a depression. A recession typically occurs when private sector demand becomes so inadequate that the economy contracts and cannot employ large numbers of workers seeking jobs.
Reducing government expenditures during the recovery from a severe recession can cause public sector demand to decrease. Raising taxes during the recovery from a severe recession can cause private sector demand to fall. Both austerity measures can make the recession worse (or throw the economy back into recession). If the recession becomes more severe, austerity can cause the budget deficit to grow. Austerity can never “ensure” that the national budget deficit will fall. The assumption that it can do so ignores the dynamic interaction of the economy, fiscal policy, and the budget.
In the United States, conservative Republicans have long championed one aspect of this essential truth – the demand for “dynamic scoring” in calculating the likely federal budgetary outcome of reducing taxes. This “supply-side” claim is vastly overstated – very large reductions in taxes undertaken while the economy is near fully employment have not caused economic growth to increase so rapidly that the net effect of the tax cuts is an increase in tax revenues. Reducing the marginal tax rate for the wealthy during the recession is a poor means of increasing private sector demand. The supply-sider claim that the Congressional Budget Office (CBO) should employ “dynamic scoring” to predict that the net effect of tax reductions is increased tax revenues rests on an economic theory that has failed empirically, but the insight that there is a dynamic interaction between the economy, fiscal policy, and the budget is correct.
The fact that Spanish austerity has deepened its budget deficit is no mystery. Spain increased taxes and cut public spending. It fell into an even deeper depression. Having seen austerity fail and impose ever more terrible costs on its citizens has no effect on dogma. The Spanish government remains certain that if it simply pushes a few more millions of its citizens into unemployment it will “ensure” that it will meet its latest budget deficit reduction targets.
Catalonia as the cur which must be brought “to heel”
Recall the article’s statement that the Spanish government “struggled to impose budget discipline on the country’s restive regions.” Regional governments face all the urgent needs to spend that are increased by a depression, suffer the severe drop in tax revenues, and have very limited ability to borrow. A humane and economically rational national government would follow counter-cyclical fiscal policies to combat the depression, including greatly increased financial aid to the regions. These very real problems that the regional governments struggle with are causing great human misery. The article briefly notes some of the facts establishing that misery.
“Citing severe liquidity strains, Catalonia’s government has delayed July payments for social-service providers, including hospitals and retirement homes. As many as 100,000 employees could suffer payment delays as a result, local media say. Spanish regions are responsible for over a third of spending in the highly decentralized country, including politically sensitive areas such as health and education.”
The WSJ conveys no real sympathy for their struggle or the misery and no analysis of why it is the national austerity policy that is the problem rather than the solution. “Health and education” are not merely “politically sensitive areas,” for the economic, political, and social future of the nation rests largely on health and education. The article treats the regional government leaders as undisciplined, profligate children who require adult supervision by Spain’s national leaders. The victims are demonized and the Spanish national leaders who have gratuitously thrown their nation into a depression and intend to double down on their failed austerity policies are lionized. The metaphor that the article presents treats the regional governmental leaders as curs who must be brought “to heel.”
“Some analysts worry the new target is already at risk, given the central government’s deteriorating finances and its difficulty in bringing the country’s regions to heel.”
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.
Follow him on Twitter: @williamkblack
There is no connection between the austerity and the number of jobs. This is because when there are less jobs there is less money to spend so the situation is a chicken and egg one.
The number of jobs in a country depends directly on the demand for goods and this varies inversly as their price. Unfortunately in Spain and many other places too, the opportunities to work are limited by the monopolistic behavour of the land owners who are speculating in the land values by holding some sites out of use, which drives up the competition for what is available, along with the rents that the tennants must pay to have access to this natural resource. This results in the high prices.
Its not the control of money, its the control of land that counts. By taxing land values instead of incomes a government can stop land value speculation, so a small number of greedy land owners would no longer be able to raise the production costs, reduce the demand and spoil the prosperity.
Some graphics on Spain’s debt to GDP are telling a different story altogether:
Not reflected on the graph is a €100 Billions “Bank Bailout” raising the debt to GDP to 76 or 78% and a contemplated Spanish government bailout that projected the Spanish debt to GDP to about 100% of GDP. The Prime Minister has been in office for less than 2/3 of a year and in that space of time has taken the Spanish National Debt from about 66% to the latest estimate of 100%. These figures take on scale when the GDP of Spain is 4th largest in the EMU (European Monetary Union) at a respectable €1,500 Billions before the crisis caused depression and collapse of the economy, deflating by current estimate about 7% per year (or €105 Billions).
One thing to note in the debt to GDP graphs is the percent debt in 2008 (36.1%) and the steep rise thereafter. The former PM Zapatero being forced into radically increasing debt through pressure from the European Troika ideologues imposing their dogma. Poor Spain, so far from heaven, so close to IMF, ECB and in the EMU.
The Spanish PM Rajoy is fiddling in Moncloa (the PM’s official palace in Madrid) whilst his country is burning to the ground. Einstein’s remarks on insanity being defined by repeatedly doing the same things over and over all-the-while expecting different results certainly fits the national leadership in Spain. Latest reports have critical reporters employed in the national television news being fired and their reports curtailed – how very Republican (US), how very totalitarian.
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The next ‘market-based’ solution will be to eliminate unemployment payments … that will make them get a job !
Spain has had huge deficit in current account and balance of trade, and a corresponding buildup of private sector debt. These things are nothing you can hide, for those who wanted to see it was obvious there was problems ahead.
So at the same time government is reducing debt as current account deficit is growing, national accounting 101 is unambiguous, there is no escape private sector debt must rise correspondingly.
The common market and the euro made it “risk free” to pump in surpluses that was financial leveraged in to Spain’s, Ireland Latvia’s and so on housing bubbles that could pay virtuous northern countries export surpluses.
Not very much Spain and the other could do about it they were restrained from taking measures against excessive imports by the EU systems integrated markets for gods and capital. They also had no currency of their own that could be depressed and make imports expensive.
Let’s say now e.g. Spain around 2004/5 had implemented todays austerity measures to curb import, anyone think it had been applauded by Germany and other northern export surplus countries? No they had probably been warned and EU had threatened with punishment due to tampering with the holy common market.
Here is a couple of charts on trade and current account, interesting to see if one adjust to a longer perspective. Had there been an chart of private debt accumulation it would probably fitted nicely with these.
the unemployment chart can bee extended to 1987, only between 2006 to 2008 have it been under 10%.
Dear Mr. Black,
Thank you for you commentary, it is always a pleasure to be reminded how skewed and sometimes non-sensical financial newspapers can be.
These austerity measures being imposed on the Spanish (TINA, always TINA) will destroy a whole generation of able youth, pensioners, and bring about the destruction of the middle class. Income disparity in Spain is higher now than in the beginning of the 60’s under Franco.
I would like to point out that one big, very big, problem in Spain comes from our politicians (both parties). The two main parties are clientelist holdovers from the Franco regime, one being the national-catholic side (conservative -PP) and the other the falangist side (PSOE). These partitocratic regime has overseen the creation of 17 states-within-the-state with duplicated responsibilities in all matters, thousands of useless municipalities, mancommunities (holdovers from the 13th century), regional mini-states within the 17 Autonomies, savings and loans for every region (all of them gone or going under now) that were controlled by politically appointed directos with little or no prior experience in banking to ensure that every local cacique (political chieftain) could have his own Calatrava or Norman Foster architectural monstruosity in his region, finance his buddies and fellow directors at 0% interest, give themselves golden parachutes that would make Dimon blush, etc.
Our “politicians” also oversaw the creation of more than 4.000 “state enterprises” where their nephews, friends, wives, etc could get paid without even showing up for work and, more importantly, hide the regional debts from the balance sheet. There are 500.000 remunerated positions (advisors, etc) directly appointed by politicians in Spain at a mean salary of € 50.000/year; there are 1.500.000 people working in “state enterprises” (I am not counting state owned utilities, all of them “firesaled” to their buddies) that are all deficitary.
I have not seen any commentary or analysis regarding this except for in a few opinion pieces and, of course, I have not seen our useless politicians tackle or try to rationalize this monstruosity. Mind you, I am not at all in favor of “lean government”; I think government needs to regulate and provide services (that’s why we pay taxes, theoretically) but in Spain, our partitocracy has used the wealth of the nation to its advantage since at least 1000 years ago…denominations change, the same behaviour goes about.
In short: the scandal in Spain is our political class, a holdover from Franco’s regime, which at the same time was a holdover of the Liberal/Conservative partitocracy before it (brief lapse of republic, which our own people hated….most of them did).
Sorry for the length.
Spain’s austerity policy is basically an example of Shoot Into The Crowd economics. It will continue as long as the government is convinced that it can bring the people to heel by killing a few protestors if they go into the streets. Funny how economic doctrines that supposedly favor smaller government wind up depending for their “success” on the massive use of lethal governmental power. Heh.
Poor Steve dog; he just dogmatically pukes up what americans who are employed and consequently enfranchised robotically repeat the dogma they get off TV; there’s enough jobs, go get one. Well, during the great depression, there were nowhere near enough jobs, and Howard Zinn points out that there have never been enough good living wage jobs in the entire US history. Further what you learn is that you don’t make a killing profit in business by paying a living wage with benefits. Mitt Romney and friends made their wealth by cutting wages, breaking unions, and stealing pension funds into the reorganized businesses. The jobs that went overseas to sweatshops were put there by funding from the Overseas Private Investment Corporation paid for by the taxpayers. A union steward at Oregon Steel was run over by a company dump truck as he got out of his car to go to a meeting one day. That was before they stole their pension funds into that reorganized business. The police called it an accident; I call it murder. He knew about the theft.
Lyle, that was sarcasm. My God, you are thick.
Superb interview !
Oops. That was meant for Prof Wrays interview.
Austerity merely is a program to starve the economy and feed the government. So why is anyone surprised when the economy starves?
This problem began years ago, when the euro nations foolishly surrendered their Monetary Sovereignty and adopted the euro. I predicted this exact scenario in a speech way back on 6/5/2005 at UMKC, when I said, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”
There are two, and only two solutions for the euro nations. Either:
1. Re-adopt your sovereign currency
2. Form a financial version of a United States of Europe, in which the EU would give (not lend) euros to member nations.
Rodger Malcolm Mitchell
@Rodger Malcolm Mitchell, 10 August 2012, 9:12 am
Chance to differ with your solutions as well as analysis. The EMU (European Monetary Union) was formed at a time when the philosophy of economics was exclusively that of the Chicago School of Economic Phrenology, and the world is wisening to the bankruptcy of that economic ideology. Instead of “The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff”, a much better phrasing would be The Euro was originally designed incompletely for which there are solutions other than either tear it down completely (your solution 1) or coerce it into the US model (your solution 2). As the EU (European Union) is not designed on the US federal scheme, it would be senseless to apply the US form to something that does not operate in the same fashion. The obvious problem with the economic design of the EMU is that it has no control over insidious market forces whose interests do not coincide with the interests of governance, financial responsibility being one of those interests. In short, manners must be put on the market, not continuing the present situation where the tail wags the dog. Furthermore, it would seem apparent that the current situation needs be reversed, and what better tool to do that than create a monopoly that controls the exchange of national government bonds for financial funds looking for secure shelter with a specific return over a specified time. This would require commissioning the ECB (European Central Bank) and the NCB (National Central Banks) and their licensed, regulated subordinated banks to control the issuance of all EMU members bonds and oversee their servicing (here is solution #3), becoming the seller of bonds rather than the purchaser of private financial funds to fill public deficits.
It would be a tragedy if the EMU experiment that has proven that a common currency is possible beyond national borders and is universally acceptable were to be tarnished with a faulty systemic failure and discarded. It will be necessary to start looking beyond the limitations of past economic education and re-formulate how economics are known. Without a functioning and common economic language, the tower of Babel will not have a foundation from which to build.
Not sure I understand your proposal, but it sounds like you advocate nations that have no hope of paying their current debts (because they surrendered their Monetary Sovereignty), now should go even deeper into debt. True?
And as for the euro, it does make trade a bit easier by eliminating money exchange, but that convenience seems to be outweighed by the terrible costs of austerity.
I was right when, way back in 2005, I predicted this crisis, and said why the crisis would occur. Now that the crisis has occurred, just as I said it would, people are scrambling to find a Rube Goldberg cure.
Rodger Malcolm Mitchell
It pleases me somewhat you were right back in 2005, those who were right made out like bandits and got very rich. I recall precious few who predicted 2007 or 2008 or any of the the years that followed but then most who did forecast accurately were without voice to be heard.
“… nations that have no hope of paying their current debts (because they surrendered their Monetary Sovereignty), now should go even deeper into debt …”.
Just where did I advocate that? I have neither knowledge of your vocabulary nor your level of comprehending what you read. These are delusions you are bringing into what was written. Spain and Ireland both had remarkably low ratios of public debt to GNP in the EMU, Portugal not so much as its economic poverty did not allow, Italy’s public spending was always questionable, and only Greece, aided and abetted by Goldman Sachs (surprise,surprise) came close to outright fraud and got its wings singed. The propaganda that these nations were (with the exception of Greece) unduly profligate and wanton is a slander upon their mostly responsible conduct of public affairs. Corruption will always be found in public places, only when it is widespread and beyond correction does it become an existential threat. What these countries all did was to provide economic shelter and income to German, French, British and some WS investment until that investment was precipitously withdrawn, the same tactic used with Japan and the Asian Tiger economies, many still in recovery, few attaining their former economic positions decades later. But then the British used debt to obtain suzerainty over Egypt by financing a canal in the 19th century, and later to eviscerate the wealth of the Ottoman Empire by the same technique of creating debt through ‘investment’. Now the Troika of IMF, ECB and EU are doing the same to gain control of the remaining public assets of the PIIGS +. Spain’s percentage of debt to GDP has grown from about 67% to nearly 100% (a current estimate) in the last 6 months the current government has been in office whilst the risk premium remains at unsustainable levels and the credit ratings fall at gathering speed. That is the market that needs manners be put on it as already been mentioned, whether you have understood or not. If anything can be described as Rube Goldberg, it is continuing to attempt economic success using traditional neo-liberal economic doctrine, even that from the London School of Economic Legerdemain.
T-Bear: As the EU (European Union) is not designed on the US federal scheme, it would be senseless to apply the US form to something that does not operate in the same fashion. Rodger’s point is that there are only 2 conceivable solutions. Where a”solution” is an economy, a society that works in some way as a means to provide for its citizens. There is no way to operate in a different fashion. What Europe has now is a crazy suicide pact where the only decision allowed is who is pushed off the cliff first. The rich & the center & many, not all of the banks are running a scheme to impoverish, enslave and kill everyone else. Basically the 2 solutions are just one solution: a normal country, with some kind of monetary sovereignty. (1) is many normal countries (2) is one normal country.
Your solution appears to be a very bad form of (2) the US Federal Model, and more or less the ultimate aim of the maniacs currently running Europe. The ECB & the NCBs running the show, dictating to the figurehead governments. All power to the people who created the crisis. None to the people of Europe. No democracy.
The propaganda that these nations were (with the exception of Greece) unduly profligate and wanton is a slander upon their mostly responsible conduct of public affairs. Illustrates the problem with your analysis. What you call “responsibility” is irresponsibility. Europe’s problem has been insane underspending causing high unemployment for decades. Their national debts were too small. Their conduct of public affairs in this respect has been extremely irresponsible – with the exception of Greece, perhaps! But as one can learn from articles by Wray here, from the perspective of the Eurostates as mere administrative subdivisions of the ECB empire, their spending has been very irresponsible, more precisely their spending, pretending as if they were normal states, coupled with the insane decision to join the Euro, the most insane monetary system of all time.
Description of the eurozone: The ship sinks while its passengers angrily reject suggestions they bail water out, and instead demand to pour more water in.
The world looks on in wonder, as the eurozone “passengers” ignore the obvious — and drown.