Two articles that should be read by anyone interested in the global financial crisis have just been published. They address Spain. Spain tends to get far less coverage in the U.S. than Ireland and Greece, but it is a far larger country and economy. Its real estate bubble, relative to GDP, was the second worst among economically developed nations. Spain is so large and its unemployment is so severe that “Almost a quarter of all the unemployed in the 28-country European Union live in Spain….” Spain’s housing bubble was funded by an out of control banking sector and the bad loans are causing increasing damage to the banks. “[B]anks’ assets continue to deteriorate with an increase in the number of loans not being paid back.”
At yearend 2013, the Spanish government and the EU were desperately trying to spin Spain as a success story attributable to austerity and labor “reform.” Citing a nation with 26% unemployment as one’s great success story, a few weeks before Spain had to admit that the unemployment rate had increased, is sad. I asked a former student who is a financial reporter what the EU considers a failure, if Spain is their great success. The reporter answered: “Cyprus.”
The two articles I’m recommending need to be read together. Start with Stephen Burgen’s January 23, 2014 article entitled “Spain’s unemployment rise tempers green shoots of recovery.”
“[Spain’s] unemployment rate has risen above 26%, according to official figures.
Data published on Thursday by Spain’s statistics office show a further 198,900 jobs were lost in 2013. The total number of unemployed is now 5.9 million.”
These overall numbers get uglier when one examines the detail. Two troubling developments have held down unemployment to “only” 26%. Large scale migration has kept the unemployment rate much lower than it would otherwise be, but at great cost to the nation’s future. The Spanish government has encouraged firms to shift to part-time jobs that lack normal job protections. Economists have urged Spain to take actions like this to reduce wages.
“Part-time jobs increased by 140,400 and full-time declined by 339,300. The main effect of the government’s much touted labour reforms has been an increase in those in part-time work, which now accounts for 16.34% of the total.”
The Spanish government has responded to the crisis with austerity that simultaneously maximizes the pro-cyclical fiscal drag that worsens Spain’s Great Depression and revels in its callousness to the worker.
“[T]he prime minister said the cabinet had decided to freeze the minimum wage for next year at 645.30 [euros] ($890) a month while lifting pensions, which are no longer linked to inflation, by just 0.25 percent.”
Long-term unemployment has surged and is concentrated among households and regions.
“[W]ell over half of Spain’s jobless are considered long term having been out of work for more than a year.
The number of Spanish homes in which all members eligible to work cannot find a job rose in the fourth quarter to 1.8 million.”
Many people have been unemployed so long that they are denied benefits.
“Long-term unemployment has led to an increase in the number of people who are no longer entitled to benefits. There are now 686,600 households in which none of their members has an income of any kind.”
But this harm to workers has not been severe enough to please key European economists who bemoan that Spain “prevents wages from falling quickly enough.” Spain is suffering a Great Depression. Demand is grotesquely inadequate. The economists want to cut wages of workers, which will significantly reduce demand. Their idea of economic medicine is equivalent to a doctor wanting to bleed a patient.
TINA becomes TWNEA
The IMF, European Commission, and the ECB are referred to as the troika. Their meme throughout the crisis has been “there is no alternative” (TINA) to austerity, slashing workers’ wages, and mass privatization. The troika’s effort to spin Spain as it success story hit a big pothole when Spain announced on Thursday, January 23, 2014 that the unemployment rate had increased.
“Thursday’s figures were met with official silence in Madrid. But in an interview with El País, the European commissioner for economic and monetary affairs, Ollie Rehn, said that in Spain the EU had tried to combine the goal of solvent public finances with economic reforms.
‘There were no easy alternatives for Spain nor for anyone. Those that think there was a simple way to recover access to the markets without painful measures are wrong,’ he told the paper. ‘It will take 10 years to fix the Spanish crisis.’”
“Official silence” was a good strategy. Rehn’s comment shows the danger of a misplaced spin. Rehn admits that the troika’s Spanish success story is a fantasy. He hopes that they will be able “to fix the Spanish crisis” in “10 years” (i.e., in 2024). Spain’s property bubble peaked in late 2006. That means that theoclassical economists failed to stop a bubble that was hyper-inflating for at least six years (2000 – 2006) and that austerity has caused such a severe Great Depression in Spain that the most extreme EU propagandist for austerity hopes that it will take seventeen years (2007 – 2024) to escape the “crisis” phase. Rehn makes no guess as to how many years after 2024 it will take for Spain to recover fully and reach full employment. Rehn has consistently and dramatically underestimated the harm that austerity causes to the economy and the public. He is also the lead apologist for austerity so he has a vested interest in having it “succeed.” When Rehn predicts that it will take 17 years for Spain to fix the “crisis” phase of its Great Depression, one knows that he realizes the scale of the disaster that his theoclassical economic policies have inflicted on Spain.
Most nations recovered far more quickly from the Great Depression of the 1930s – and macroeconomic policies were primitive and often self-destructive in that era. There is no reason for Spain and other nations of the Periphery to be experiencing Great Depressions, much less Great Depressions of remotely this length.
Note that Rehn is implicitly assuming that there will be no material negative shocks over the next decade he concedes that the crisis will persist in Spain. Few economists believe that such heroic assumptions are likely to prove accurate.
Under the stress of being asked to explain why his great “success” of three weeks ago is a nightmare, Rehn abandoned TINA and adopted TWNEA. We need to focus on his exact words again.
“Ollie Rehn, said that in Spain the EU had tried to combine the goal of solvent public finances with economic reforms.
‘There were no easy alternatives for Spain nor for anyone. Those that think there was a simple way to recover access to the markets without painful measures are wrong,’ he told the paper. ‘It will take 10 years to fix the Spanish crisis.’”
Rehn now admits that there were alternatives to austerity and slashing worker’s wages. He argues instead that “there were no easy alternatives” (TWNEA). The (unspecified) alternatives to recover “access to the markets” would not have been “simple” and would have had to employ “painful measures.” The first obvious point is that this concession is fatal to Rehn’s claims and policies. An alternative obviously does not have to be “easy” to be superior to Rehn’s austerity and labor-bashing policy that produced a virulent Great Depression that Rehn hopes (if nothing bad happens in the world economy for a solid decade) will require 17 years to recover from the “crisis” phase. Logically, the alternatives are superior to the troika’s Great Depression strategy if they inflict less pain than Rehn’s optimistic alternative of 17 years of crisis.
The EU’s awful, but hidden “goal[s]”
Austerity as a perpetual “goal” rather than a means to an end
Rehn’s admission is even more fatal to his policies than it appears on first blush if one examines the ways in which he framed the debate to try to bolster the cause for a Great Depression strategy aimed at slashing workers’ wages. I know “solvent” sounds like it is a word and a concept that no sane person would oppose. The opposite of “solvent” is insolvent – broke, bankrupt – all words with powerful negative connotations.
Rehn has framed his claims cleverly, but he has crafted his framing to mislead the public and the media with the goal of causing them to support policies that will cause terrible harm to the public in general and the working class in particular. “Solvent” is code for austerity. Rehn’s framing is meant to cause people to assume that if the government runs a deficit it is “insolvent,” irresponsible, and headed for catastrophe.
As always, the austerians’ goal is to spread the meme that the government of a sovereign state is “just like” a household. Rehn, however, has overplayed his hand and revealed that the meme is false. Note that Rehn never defines “solvent.” He does not do so because if he tried the meme’s falsity would be more obvious. “Solvent” is an accounting concept. It is not a concept used in auditing governments with sovereign currencies because it is inapplicable.
Rehn implies that solvent means that the government must not run a deficit or there will be terrible consequences. There would be four insuperable problems if Rehn defined solvent in that manner. First, it was the crisis that caused the budget deficits rather than the deficits that caused the crisis. When there is a Great Depression workers lose jobs and income (reducing tax revenues) and more people receive unemployment aid and help from social programs (increasing expenses). Second, EU nations typically run budgetary deficits. Third the sky does not fall.
The fourth flaw is more fundamental. There is nothing morally superior about a sovereign nation running a budget surplus. If it does so when demand is already inadequate demand will become even more inadequate and unemployment will rise unless the nation is a substantial net exporter. (We can’t all be net exporters.) A Great Depression like Spain’s produces a large budget deficit because of the budgetary effects of mass unemployment that I have just explained. What the national government should do, as the overwhelmingly majority of economists agree, is to fill the inadequate demand through increased spending on useful projects. Doing so is the best, and often the only means of quickly reducing unemployment and pulling the nation out of a Great Depression. Austerity will slow the pace and extent of the recovery. Vigorous monetary policy is often ineffective in spurring recovery from a severe downturn.
Perpetual austerity in the form of a “balanced budget” cannot rationally be a “goal” of a nation state. The goal of a nation state must be the welfare of its people and a balanced budget would more often than not harm the people. Again, Rehn knows this. Even the EU is not crazy enough to mandate balanced budgets and throw the entire EU back into a gratuitous third recession in six years. It is essential to recognize that Spain, Italy, and Greece are in Great Depressions. Their unemployment levels exceed average unemployment levels for European nations during the Great Depression of the 1930s for the (few) nations from that era for which economists believe there are adequate data.
The goal of “economic reforms” is to reduce workers’ wages)
Rehn continues his misleading framing of the issues when he says that the EU’s second goal is “economic reforms.” As with “solvency,” this goal relies on the vagueness of the term. Once the term is made clear it also becomes clear to the reader that the term is Orwellian and the goal is despicable, self-destructive, and unworthy of any government. “Economic reforms” is troika trash talk that is code. The code can be paraphrased as: “force sharp cuts in worker’s wages.” This cannot be a legitimate goal of a nation state. It is class warfare in which the workers lose and the corporate CEOs become even wealthier. Rehn does not even try to explain why this is a legitimate goal. He cannot argue that corporate profits are “too low” and wages are “too high” because corporate profits are often at extreme levels. Rehn’s framing sets the workers of every EU state in competition with each other to see who will “win” the “race to the bottom” of wages and benefits. The Spanish are told that they must cut workers’ wages to be competitive with Italy’s workers (who are told they must cut their wages to compete with the Greeks). I call this the “Road to Bangladesh” dynamic.
Rehn’s statement of the EU’s goals reveals that those “goals” are not the legitimate goal of any EU member state. Rehn states that the EU’s goals are to reduce national government spending and sharply reduce workers’ wages. The EU’s goals described by Rehn are ideological, and achieving the goals would harm the people of the EU.
Note what goals don’t make Rehn’s list of the EU’s paramount goals
Full employment is not a goal. A prompt, dramatic reduction in unemployment is not a goal. Reducing poverty is not a goal. Providing superior education is not a goal. Making Spain’s recover sufficiently robust to stem the loss of its college graduates to migration is not a goal. Reducing inequality is not a goal. Preventing future crises by ensuring that each nation state vigorously regulates banks is not a goal. Reducing the global financial risk posed by requiring systemically dangerous institutions (SDIs) to shrink to the point that they no longer pose such a risk is not a goal. Acting vigorously against global climate change is not a goal.
Was there no “simple way to recover access to the markets without painful measures?”
Rehn has again tried to frame the standard such that anyone who disagrees with him must be irrational. Only adolescents believe that anything important in life is “simple” and “pain[less].” Maturity teaches that life is not simple and painless. But Rehn loses even though his rhetoric and framing were designed to stack the deck in his favor. The reason Rehn loses provides a wonderful irony and will bring us to the second article I recommend reading.
We need, however, to provide a brief overview of the aspect of the financial crisis that provides the setting for evaluating Rehn’s claims about the struggle of the nations of the periphery to “recover access to the markets” (that is jargon for restoring Spain’s ability to borrow).
The financial crisis and the inherent, critical flaws of the euro (in which member nations gave up their sovereign currencies) led to a death spiral in which the “bond vigilantes” (banks and hedge funds) would demand higher interest rates to buy sovereign debt of nations of the European periphery, which would increase their deficits, which would give the credit rating agencies the pretext to downgrade their ratings, which would further increase interest rates on the debt issued by the EU’s periphery nations. The ECB adopted a policy of encouraging the bond vigilantes – because they coerced the Periphery to make large cuts in budgets and to make “reforms” to slash wages. But the ECB did not want an actual default because that could lead the euro to unwind. The ECB, therefore intervened, typically after months of delays. It generally waited until a nation was on the brink of collapse. That gave the ECB the leverage to ensure that the nations of the periphery agreed to the troika’s demands to adopt its twin goals – austerity forever and slashing workers’ wages.
The troika discovered, however, that it had lost control of the bond vigilantes. The troika had outsourced the “leg breaking” role of the loan shark to private parties and the bond vigilantes found that turning financial crises into emergencies maximized their profits. The vigilantes’ coordinated assaults soon turned the EU’s periphery into the “crisis of the week” show.
“Spain was pushed to the brink of an all-out sovereign bailout in 2012 but was saved in large part by a European Central Bank promise to intervene if necessary on the bond market, lowering the country’s borrowing costs.”
The ECB was taking on tens of billions of euros in toxic assets and there was no end in sight. The situation was desperate and any adult “knows” that there was no “simple” and non-“painful” means to restore Spain’s ability to access the credit markets.
The ECB stops the bond vigilantes’ raids on the Periphery
The irony is that there was a simple and non-painful means for the ECB to stop the bond vigilantes’ attacks on EU nations. Benn Steil and Dinah Walker’s January 24, 2014 article entitled “The Euro Crisis is Dead! Long Live the Euro Crisis!” explains why we know Rehn was wrong and knew he was wrong about the terrible pain of restoring Spain’s access to debt markets.
“You’ve got to hand it to Mario Draghi. Never in the history of central banking has one man accomplished so much with so few words and even less action.
Since having announced the creation of the Outright Monetary Transaction (OMT) program in August 2012, Draghi has had the pleasure of sitting back and watching yield spreads between Spanish and German government bonds fall relentlessly without having to buy a single bond. Italian spreads have done the same.”
As soon as the bond vigilantes began their attacks a wide range of economists explained that there were simple and non-painful means by which the ECB could stop the bond vigilantes and urged the ECB to act urgently. Jean-Claude Trichet refused. Draghi, his successor as the head of the ECB, followed the economists’ advice. The results have been obvious for 18 months, so it is a testament to Rehn’s disregard for reality that he would make a claim about restoring “access to the markets” that everyone in finance knows to be false. But Draghi continues to use the ECB to extort EU nations to agree to the troika’s goals (austerity and slashing wages) to receive the ECB’s protection from the bond vigilantes. Draghi cheerfully runs a protection racket.
What about unemployment
Rehn didn’t claim that there was no “simple” and non-“painful” means of reducing unemployment and increasing economic growth. The EU does face complex and painful restrictions on nations that wish to decrease unemployment and increase economic growth. The EU is not a truly sovereign currency and by joining it nations give up the three most effective means of decreasing unemployment and increasing economic growth when they are in recession. They cannot provide meaningful fiscal stimulus, they cannot devalue their currency, and they cannot adopt an aggressive monetary policy.
The EU is acting like a runner who starts a journey by following the advice they read from som nut on the internet to shackle his ankles to a lead weight so that he won’t run too fast and break a leg. It’s true that the runner can no longer run, but that doesn’t mean there is no non-painful means of allowing him to run. He needs the keys to unlock the shackles and the education to understand that he should never listen to quacks like Rehn.
Nations can take excellent steps to run faster (and avoid breaking their legs) by creating a robust system of automatic stabilizers before the next crisis hits. The stabilizers help reduce the extent to which the economy falls during the recession, so the nation doesn’t have to dig itself out of as deep a hole, and they speed the recovery. The automatic stabilizers do inflict some pain when the economy is booming (taxes go up and progressive taxes increase more rapidly). But this pain is visited primarily on folks who are doing increasingly well in the boom times, so the pain is far from severe.
Rehn is talking about how counter-cyclical fiscal policy works in the other direction – when the nation is in a severe recession or depression. In those circumstances, the appropriate fiscal policy does not inflict pain. National government spending increases, providing vital services when they are most needed. Taxes are cut, particularly on those most in need if the tax system is progressive. Highly useful infrastructure and preventive maintenance can be provided that will benefit future generations.
Rehn, as a deficit hawk, would be aghast at the deficits and debts. Rehn repeats the error that FDR’s economists made in 1937 when they convinced him to choke off government spending increases – turning a strong recovery into the second trough of the Great Depression. Rehn would have warned in 1941 that the U.S. was entering into ruinous debt to fight World War II and that the debt would condemn the U.S. to decades of economic ruin. He would have been as wrong then as he has proven now. Even the IMF’s economists have admitted to being surprised about the great effectiveness of stimulus programs in this crisis.
It isn’t “simple,” particularly if the automatic stabilizers are weakened, to use fiscal policy to help reduce the severity and length of a recession. There are political difficulties and implementation difficulties. It helps to identify useful infrastructure and maintenance projects in advance of the crisis and plan before the crisis which programs will be done first. As inadequate in magnitude as the U.S. stimulus package was in this crisis, and as badly oriented towards tax cuts for the wealthy as it was, the data demonstrate its substantial effectiveness in reversing a sharp decline and producing a moderate recovery. The difficulties do not lie in the economics, but in the politics generated by austerians who demand that the government bleed the patient to make him better.
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