There is a peculiar aspect of the present Economic Policy dance. It isn’t talked about much. It just sort of happens and everyone ignores it. ( Or maybe they don’t recognize it…) It is the Dance Of The Schizoid Advisers…
On the one hand, we have the bulk of present day economists as Keynesians. We see this in The Bernank along with the European Central Bank. We see it in both the Democrats and the Republicans. We see it in the leaders of Italy and Greece. We see it on the floor of the various exchanges where stock and commodity brokers wish for more “stimulus” to “get things moving”. When in doubt, spend more!
Baby Bush was all for it (starting the first Stimulus Bolus moving). Obama and the Dims are all for it ( $16 Trillion in debt and rising at $1.4 Trillion / year! Now that’s stimulus!!)
On the other hand we have the IMF and the bond traders. Sourpusses one and all. Asking for uncomfortable “concessions” from folks like the Greeks. Why? Well, they want their money back, even if they do have to wait for “someday” to come… The Bond traders don’t want to buy junk headed for the scrap heap. (Though they don’t mind buying junk just about to rise back to ‘investment grade’ under ‘austerity’). These folks look at the amount of government spending (both in total and as a percent of GDP) and say: “Less Spending! Be frugal. Cut taxes and government size.” But they only want taxes cut after the budget is balanced…
Yet noone seems to ask: “How can they BOTH be right?” One asking for more concessions, austerity, and spending cuts. The other saying “more spending is the right way!”… Both are various collections of financial and economic experts. Yet the advice is ‘exactly backwards’ between the two groups, and nobody says anything.
For example, this story about Greece:
Greece’s lenders object to parts of its austerity plan
Reuters – 23 hours ago
Reuters – Sun, Sep 9, 2012 4:24 PM EDT
By Lefteris Papadimas
ATHENS (Reuters) – Greece’s foreign lenders have rejected parts of a nearly 12-billion-euro austerity package prepared by the government, Greek officials said on Sunday as the two sides resumed talks after a month-long hiatus.
The so-called “troika” of inspectors from the European Commission, the European Central Bank and the International Monetary Fund returned to Athens on Friday to conclude a report on Greece’s progress in meeting the terms of its latest bailout.
OK, got that? Greece is deep in the doo from having done the Keynsian Dance just way too long. It is a poster child for excess government spending, loads of debt, just Fiscal Stimulus by the TON! You would think it would have the most spectacularly explosive economy on the planet… But no, it is moribund. Italy is in a similar boat, as is Spain and several others.
So their economy is in the dumper, high unemployment, stagnation in the business sector. The normal prescription for that circumstance is a mix of “Monetary Stimulus” and “Fiscal Stimulus”. Those are code words for “easy money from the central bank” and “deficit spending by the government”. Yet a load of ‘easy money’ has been shoved at the PIIGS (all those bond sales, bank recapitalizations, direct loans ) and Greece is a poster child for deficit spending by government.
Clearly something is wrong with the idea that those actions cure this problem… Which makes the ECB / IMF / EC position look a lot more reasonable. They want a fiscally sound debtor who will pay back the loans. For that, they want a functioning economy with money being sent back to THEM, not put in the pockets of retirees and folks “working” a 30 hour work week producing nothing that generates revenue…
Yet, oddly, the ECB and The Fed and the various others all are Keynesian. At least when it isn’t their money on the line…
The inspectors, who held talks with Greece’s finance minister on Sunday, must approve the plan to trim roughly 11.7 billion euros from the state budget over the next two years if Athens is to get a green light for the bailout money it needs to avoid bankruptcy.
“The troika has not accepted all the measures, but we have alternative proposals,” said Socialist leader Evangelos Venizelos, a junior partner in the ruling coalition who was briefed by the finance minister at a party leaders’ meeting.
Greek Finance Minister Yannis Stournaras played down the inspectors’ objections, saying they had rejected only a “few” measures. A senior Greek government official had said earlier that the troika had sought more details on the proposals to understand them better.
Could it be that old line about Socialism failing when it runs out of “other people’s money to spend”? And perhaps even the other Euro-Socialists recognize the “end stage decline” and suddenly become a bit more capitalist when it is their money on the line?
Officials declined to specify what the objections related to but a source familiar with the matter said they were over measures to save roughly 2 billion euros by cutting expenses in the public sector.
Oh Dear! The dreaded “cutting expenses” in government… i.e. patronage and favors handed out as ‘jobs’ sucking up largess at the expense of the producers in the economy.
NO politician of any political bent can long survive the squeals and squalls that blow up in their face when folks comfortably sucking on the public teat are told it is weaning time… Neither democracies (where those are votes and bribe payers and ‘lobbyists’) nor good socialists (where those are party members and commissars and party faithful) nor even Keynesians where those are “fiscal stimulus” that would turn into “economic downturn”. Can’t have unemployment numbers going UP during a recession, after all…
And yet, these Troika Bankers are demanding just that.
The austerity package, which Prime Minister Antonis Samaras has yet to persuade his allies to sign off on, contains a new round of unpopular wage and pension cuts for the next two years that his coalition partners are loathe to be associated with.
The latest round of talks on Sunday between Samaras and his allies, Venizelos and Democratic Left chief Fotis Kouvelis, failed to get an agreement on the austerity package and the three sides said they would resume discussions on Wednesday.
The premier’s allies have objected to across-the-board cuts on wages and pensions saying they want to shield poorer Greeks from further misery.
They also want a greater emphasis on measures to revive an economy languishing in its fifth year of recession. They deny that the fragile three-party coalition is at risk over the savings plan.
Thousands of Greeks demonstrated against the proposed cuts at a prominent annual trade fair on Saturday in the northern city of Thessaloniki, and more protests are expected in the coming days.
Athens argues it needs two more years to push through the austerity cuts because of a deepening recession, but the country’s lenders – exasperated by broken promises of reform – have demanded the country first deliver on its pledges before seeking any concessions.
And there you have it in a nutshell. On the one side, the lenders expecting to have the money repaid. On the other, those dependent on government handouts ( call it “social justice” or call it “safety net” or call it “retirement package” or call it “medical plan”… or even just call it ‘government paycheck’…) saying “no way” to cuts.
Greece faces bankruptcy and a potential euro zone exit without the next tranche of aid, an issue that European leaders are expected to decide on next month.
(Writing by Deepa Babington; Editing by Greg Mahlich and Andrew Osborn)
So there we have it, in a nutshell. On the one hand, the end game of too much Keynesian Stimulus such that it has been mutated from the original form / intent: a very short term excess spending to be offset by reduced spending during ‘good times’ to have an overall balanced budget; mutating it into Socialism and Government Palimony. On the other hand, even the “Social Democracies” of the EU not willing to put their money at risk handing out too many goodies to others outside their political sphere of benefits.
The very same scenario is oh so slowly unwinding in the USA. States and cities that have handed out way too many ‘goodies’ and promisses. A Federal Government that has promised even more ( about $120 Trillion last I looked) and has no way in hell of ever paying it. Various forms of “government largess” from “Social Programs” to excessive wages and benefits packages to way over the top Porkulus Stimulus to ‘Friends Of The Government’ and way too much Crony Capitalism.
And now the Bill is coming Due.
So the same problems will also show up here.
In Chicago this week, the teachers have gone on strike. Unhappy with a 16% pay rise package over 4 years. Never mind that revenues to the city will not be rising to match. Never mind that the economy is in the dumper. Never mind that we’ve seen Detroit shrink dramatically (and property tax revenues with it…) as an existence proof of what happens when too many costs are layered on top of a productive process. (Making cars is still economically a gain and wealth producing; just much more so in Korea or Mexico…) Do I think Chicago will be the next Detroit? No, they have a much more diverse economy and many more options. But I do think they are on their way (as is the whole country) to a financial crisis and that 16% pay hikes are just going to accelerate the process.
If you look at the way the “Stimulus” was handed out, a lot of it went to schools. We’re already in the end game where ever more Government Largess from ever more sources is handed out to ever more folks with a good story. Solar power is in the same bucket. It only sells due to ‘subsidy’. That means government sinking money into non-economic activities.
California is crowing over the fact that they are ‘on their way’ to their goal of 20% ‘renewable’ sources for electricity, even as the State is bankrupted and electricity costs spike up to the point where even Apple, a die hard local company with buckets of money, built their new Cloud data center out of State. I was at Apple in prior times when they bought a giant data center in N. California with more capacity than they could need. Backup power from jet turbines on site, just to give an idea of scale. They had at least 3 major data centers already in California. Clearly there was a decision made to leave…
For the life of me, I don’t understand how the same people who can be all in favor of more “Stimulus” and ever more Keynesian Government Budgets and ever more Subsidy et. al. can be the same folks who demand Austerity and budget cuts when the money goes outside their country, yet they are. The IMF is a creation of the same nations that run large Keynesian operations inside their own countries. The ECB could not even remotely be accused of being an Austrian School operation. At best “conservative Keynesian” IMHO.
My take on it all?
What Keynes really said was that you could do the stimulus thing for a little while when the economy was in a downturn; but during the following bubble economy you needed to have the government run a surplus. Both to repay that prior deficit spending and to dampen the bubble.
Instead, all that the politicians (and many of the Central Bankers and ALL of the Socialists) seem to remember is that “spend to stimulate” part. Completely missing that if you spend every day wired on speed, you become habituated to it. It loses it’s ‘punch’ and you eventually need the dope just to stay awake. It’s “no joy” and you end up spending ever more just to be ‘normal’. Eventually you hit the wall and collapse as too much of any drug eventually causes a decline.
Then, when that “sick man” with a drug habit shows up at the beggars window asking for spare change; only then is it clear to the folks with the money that too much of the drug is a bad thing. The “cure” is demanded. Dry out, going cold turkey.
Once again we’re back at the old question: “Malice or Stupidity?”
Is this a ‘grand fleecing’ by the IMF and World Bankers? Or just that most folks, even bankers and especially politicians, and certainly the voting public; simply don’t ‘get it’ how the system really works. They are stupid enough to think they were doing the right thing with “stimulus on stimulus” and just don’t know how to do the other half of Keynes: run a surplus in times of plenty to take the punch bowl away from the bubble process. Were the Dimocrats stupid to demand the CRA force lending to folks who could not pay and had no income? Were the Bankers evil to produce “Liar Loans” to avoid the legal penalties in the CRA for NOT lending to ‘redline’ areas and high risk borrowers? Were the Republicrims stupid to demand a freer hand for those Bankers (repeal of Glass-Steagall) in exchange for letting Clinton and friends expand the CRA? Clearly yes to all… But that does not clarify “stupid” vs “malice”…
IMHO the correct metric is “greed”. The Bankers were greedy for a merger of investment banking, retail banking, and insurance. The result was the firestorm of the contagion aspect of the financial crisis. (that was what Glass-Steagall was designed to prevent – exactly the implosion contagion risk of Lehman to Citibank to AIG Insurance). They were also sly enough to package the “crap” they were mandated to sell by the CRA into the SIVs and other “mortgage packages” and get it off their books.
The Congress Critters were also clearly greedy. Democrats greedy for more votes and donations from folks wanting a “chicken in every pot” to be cooked inside a new home owned by folks with little ability to pay for it. Expecting to ‘stick it to the banks’ with them forced to make bad loans. Not realizing how clever they would be at moving the crap off their books. Republicans greedy for more donations from Financial Industry members to get Glass-Steagall off their necks and get a freer hand to do those financially creative things that would let them “securitize” mortgages and make mortgage sausage.
Employees of Government were greedy for ever more in pay and benefits, enabled by a legal change that let them make unions. Democrats very happy to buy those votes with ever more legal changes and ever more “cash and benefits” handed over in ‘labor negotiations’. Republicans too, perhaps. ( I’ve seen no evidence they tried to stop it, and some that they participated too, trying to buy votes from employees – just less effective at it…)
Voters were greedy for ever more handouts from “Government” (and the various politicians oh soooo happy to take money out of our pocket to put 1/2 of it in our hand and tell us how much they want our vote… we, too stupid to notice the pocket was emptied and the hand 1/2 full; or perhaps those of us who noticed not in a position to stop it and those with larger piles in hand not wanting to stop it… “redistributive justice”…)
In the end, I think the reason we have “Selective Listening Skills” when it comes to Keynes and only hear 1/2 of what he said; and the reason we have “Selective Planning Skills” willing to hand out promises today that result in ruin tomorrow; that all of it comes down to greed. We are, collectively, too weak in morals to NOT eat all our seed corn; to NOT stay away from the whore house; to NOT get sloppy drunk on the process and sleep with the neighbor when the spouse is away. We want pleasures today, power today, money today; tomorrow be damned. So it is.
Eventually things get so bad there’s nothing left in our house that we can eat, burn, sell, whatever; for the next fix. Then we go to our neighbor and ask for a handout. Then, and only then, the neighbor looks up from their debauchery and says, in essence, “You want ME to give up MY immediate gratification? For YOU? Only if you pay me a LOT and show me that I’m going to get more Fun Time and more Money in the future. So clean yourself up and then we’ll talk.”
In more formal terms: We recognize that Keynes has been violated in the duration and that there is no alternative but to rabidly inflate away the debt or to abrogate the contracts up front; and only one of those will repay the lender…
So that’s my take on things. We’re reaching an ‘end game’ on going “A Keynes too far” driven by our collective and individual greed and lack of restraint / discipline. We had a ‘shot at it’ under Clinton when we had the ‘boom’. That was the time to keep taxes where they were, pay the debt down to zero, and prepare for the inevitable end of the bubble later.
Instead, we did the CRA expansion (fueling the bubble more), Greenspan told Congress to spend like a drunken sailor and they started spending like crazy (more fiscal stimulus during the bubble), passed the ROTH IRA law (moving more future tax revenues into those years at the expense of now) and then cut taxes (under Baby Bush) to produce even more bubble juice, just in time for the bubble (by then way over inflated) to burst.
But now that bursting was made ever more extreme (pushed to the edge of global financial collapse) and the recovery interval was compromised in that the ability of Keynesian stimulus to work, or to be available, was strongly reduced. Instead of the Government having “money in the bank” from the good time to work as stimulus and high tax rates ready to cut while living off that money in the bank; all it has is more debt, extreme debt, and tax rates already in a position where they can not be cut more. At this point, a Keynesian Fix is not going to work. It will ether be seen as “need to beg more from the neighbor to buy more dope” or it will show up as rampant inflation (depending on Central Bank decisions on money printing…)
In short: 1/2 a Keynesian Strategy with “spend it if you have it” during good times leads to overgrowth of government and economic collapse into failure of Keynesian Stimulus in the aftermath. The Social Programs and other layers of Socialism layered into law can not be removed, the spending can not be adjusted short of collapse, and the only way out is to inflate away the obligations.
That’s how I see it.
So it is “malice” or “stupidity”? Frankly, I think it’s both, heavily leavened with greed…