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Common Sense, Not Austerity, in 2011
New Year’s Hope against Hope
For Europe and the United States, 2010 was a year of disappointment. It's been three years since the bubble broke, and more than two since Lehman Brothers' collapse. In 2009, we were pulled back from the brink of depression, and 2010 was supposed to be the year of transition: as the economy got back on its feet, stimulus spending could smoothly be brought down.
Growth, it was thought, might slow slightly in 2011, but it would be a minor bump on the way to robust recovery. We could then look back at the Great Recession as a bad dream; the market economy - supported by prudent government action - would have shown its resilience.
In fact, 2010 was a nightmare. The crises in Ireland and Greece called into question the euro's viability and raised the prospect of a debt default. On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%. Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing - or would have, were not it not for legal snafus that raised doubts about America's vaunted "rule of law."
Unfortunately, the New Year's resolutions made in Europe and America were the wrong ones. The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity! The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels.
There will also be a decline in competitiveness. While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.
It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice - the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans' income is lower today than it was a dozen years ago. Simply put, most Americans didn't share in what many called the Great Moderation, but was really the Mother of All Bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?
Europe and America have the same talented people, the same resources, and the same capital that they had before the recession. They may have overvalued some of these assets; but the assets are, by and large, still there. Private financial markets misallocated capital on a massive scale in the years before the crisis, and the waste resulting from underutilization of resources has been even greater since the crisis began. The question is, how do we get these resources back to work?
Debt restructuring - writing down the debts of homeowners and, in some cases, governments - will be key. It will eventually happen. But delay is very costly - and largely unnecessary.
Banks never wanted to admit to their bad loans, and now they don't want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs. The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment, and high social distress - and even when it is a consequence of their own mistakes in lending.
But, as we know from experience, there is life after debt restructuring. No one would wish the trauma that Argentina went through in 1999-2002 on any other country. But the country also suffered in the years before the crisis - years of IMF bailouts and austerity -from high unemployment and poverty rates and low and negative growth.
Since the debt restructuring and currency devaluation, Argentina has had years of extraordinarily rapid GDP growth, with the annual rate averaging nearly 9%from 2003 to 2007. By 2009, national income was twice what it was at the nadir of the crisis, in 2002, and more than 75% above its pre-crisis peak.
Likewise, Argentina's poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the US did -unemployment is high, but still only around 8%. We could only conjecture what would have happened if it had not postponed the day of reckoning for so long - or if it had tried to put it off further.
So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess - and who are now calling for austerity and delayed restructuring - and start using a little common sense. If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.
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42 Comments so far
Show AllThe author gets it correct on the USA but not so on Europe. Yes, the economic difficulties have trickled into Europe and outsourcing to Asian markets is on the rise there too. However, there are huge differences in behavioral responses to "austerity" and in structure as far as withstanding the "storms" is concerned.
He is quite correct on Europe. Europe is at the start of a great reformation of its monetary basis, its economy and its social structure.
America is in the midst of its own.
Each nation in Europe may want its own national sovereignty economically speaking. That is not the same as calling for the same anti-public pro-private "austerity" that made the USA bankrupt beyond redemption.
We have a far better chance of avoiding bankruptcy than Europe does. Though you are correct that we have two or three states that may not be able to avoid it.
The USA is going through what amounts to a worse case of what would be normal corrections for us.
Sweden and a few others are far ahead of us and most of Europe however.
Jennifer, It looks like India is going to investigate Citibank.
http://www.ndtv.com/article/india/citibank-fraud-reserve-bank-of-india-to-probe-scam-76211
aesops dog:
You're not serious? India is one of the most corrupt countries itself.
Remember that thing about competition, privatization and self regulation back in the 80's and 90's? It now appears to have been quite a success!
We will see how that turns out. I wouldn't hold my breath since India is supposed to be one of the biggest hubs for dumping "cheap" labor from the USA and sadly some of Europe in the recent times.
Just finished "Driven Abroad" by Ron French. The situation is far more complicated, and we need to pay attention. The profiteering was not addressed in the book to the level I would have expected an investigative reporter to write, but the implications were there.
This economy is not on a slippery slope...it's in a cliff dive.
I think this guy just regurgitates other people's work and makes for good fodder to discuss.
Does he really see the true picture? Hello, Flint MI 50% unemployment
Clare Co Michigan highest poverty services percentage in US, over 40% of households require some services due to poverty.
People lose jobs to outsourcing but the stockholders are given their checks, their profits, and a one way ticket to hell.
Hello GENERAL STRIKE
How many times do we have to say...you are getting screwed. The cops, the service people, the industrial workers, the customer service people, the dressmakers,
GENERAL STRIKE...One day soon , no work, no drive, no spend. Everyone has to do it or it just won't work. Do the math. One day of not paying into the tax kitty will make a big wave in DC. But refusing to buy anything at all for as long as humanly possible will bite them all right in the shorts.
Jennifer, this story appeared this monrning....
http://news.yahoo.com/s/nm/20110104/bs_nm/us_financial_banks_foreclosure
Please note the dateline. I urge everyone to read this.
Our politicians are bought--we know who they will pay attention to. The American public is ignorant, distracted and more willing to blame government that put any faith in its core competence or integrity. The only way to get the attention of the American people is to make them suffer in real life or offer them a a distraction, a chance to bet on a football game. Since they will never be willing to pay as much attention to politics as football I have reached the conclusion that they will have to suffer quite a bit more before they even get a clue of who is causing the pain or what to do about it. Common sense is an uncommon quality in the USA.
By the time enough Americans "get a clue of who is causing the pain and what to do about it" (if they EVER do) all the wealth will be in the hands of 2% of the people and it will be too late.
The more likely scenario is that Obamabots will never stop blaming Dubya, and Dubyabots will never stop blaming Obama. To create a different outcome they will need to admit that they were suckered into voting for their respective devious candidate, and few Americans will ever be willing do do that.
Raise the minimum wage by 10% a year for the next ten years.
Raise the standard income tax deduction by 20% a year for the next ten years.
Raise the highest marginal income tax rate by 5% a year for the next ten years.
Raise the estate tax rate by 5% a year for the next ten years, while raising the exemption by 10% a year for the next ten years.
Lower the Medicare eligibility age by 5 years per year for the next ten years.
Lower the Social Security retirement age by 1 year per year for the next ten years.
Tax short-term stock transactions (less than 6 months) at a one percent rate.
Voila!! A society flowing with milk and honey for everyone, not just the parasitic rich (and also the capability and will to tackle the looming climate crisis).
Common sense in the USA of 2011? Surely you jest. We have a GOP that is crazed radical right wing loons whose only credo is tax cuts and screw everything else. GOP Rep Paul Ryan wants to privatize Social Security and Medicare and cut taxes. Paul Ryan will Chair the House Budget Committee. Darrell Issa wants to investigate everything and he called Obama the most corrupt president in US history; and he wants to cut taxes.
The Democrats are spineless, gutless, intimidated by the right wing and they have been bought off by corporate America to an alarming extent though maybe not as bad as the GOP. Common sense is dead or it has been bought off by the libertarian billionaires.
Putting it in terms of "common sense" assumes that those running the federal government are trying to act as representatives of the entire nation, with the goal of serving the people's interests in a utilitarian manner, providing the greatest benefit for the greatest number. However, this is far from reality. Until most in the US recognize that the members of Congress, executive branch, and Supreme Court do not represent the interests, ideals, or desires of the majority or the whole of the people, we will continue to have a crookocracy -- of crooks, by crooks, for crooks. And I do not see how this crookocracy is reformed other than being abolished.
The problem with the system is that we are trapped in playing on the bankster's debt "ballfield".
Unless we begin to acknowledge that the debts that people, municipalities, states and countries have incurred over the last decade or so are based upon fraud and thus are illegitimate and should never be repaid, nothing will change.
The two solutions for our debt problem seem to be either print it away and/or enact drastic austerity measures.
However, both "solutions" do nothing to challenge the legitimacy of the debt in the first place and THIS is where the argument needs to be.
Notice that there is almost never any serious talk of default.
Countries such as Ireland and Greece should start telling the IMF to go screw.
Cities and states should simply tell the banks that they're not getting their money and start issuing their own currencies.
People are already walking away from the obligations they were suckered into.
Only by acknowledging that the debt system we've enslaved ourselves to is completely illegitimate will we begin to change the world we live in.
VERY excellent post!
We do not have to go to State issued currency...
Instead each State should start its own Bank like North Dakota which is
the only State with a surplus and very low unemployment.
Then States are not subject to Hedge Funds or Bond operators but can
lend themselves and their own small businesses, farmers and students
money at a far cheaper rate.
Just as the banksters pony up to the Fed to get money for 0.25% so can
State banks...
Obviously the banksters would HATE that!
But it is what needs to be done..
All the financial analysis I read has one central message which, unfortunately, runs 180 degrees from the dominant cultural meme; the US (and most of the rest of the world) is run by greedy, short-sighted little men who just aren't very good at it. No matter how often the media ("Mini-Tru") portray them as square jawed, steely-eyed realists capable of thinking 60 moves ahead in a game of 3-d chess... they are just bunglers. Look at their record! Oh, and of course, both political parties are their whores.
Right, they bungled their way to being rich.
Considering Stiglitz was intimately involved in Clinton's administration as chief economic advisor, constructed NAFTA and left to go to the World Bank, but starting the removal of Glass-Stegall I take his conclusions with a pound of salt.
Yes Stiglitz has a neo-liberal pedigree. But his hopes for the new year seem right on to me.
1."we stop paying attention to the so-called financial wizards who got us into this mess - and who are now calling for austerity and delayed restructuring"
2."If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it."
Stiglitz has largely "repented", and is now regarded as a traitor to his class.
No commneters here have mentioned it so far, but Stiglitz is considered to be Un-American bogeyman No. 1 among the US Tea Party/FOX-watching right. I wouldn't know it either except my two extremist, right-wing, not very educated, borthers go on about him all the time. The more religious one considers him to be a potential "anti-christ" of the coming "tribulation".
This anti-Stiglitz phenomenon just goes to show you how much the corporate PR machine is capable or dictating exactly what the loony-right get in a rage about. they can turn them on an off like a light switch on a wall.
"Stiglitz is considered to be Un-American bogeyman No. 1 among the US Tea Party/FOX-watching right."
You're kidding. Not even my local Atilla has merntioned him. Anti Christ? Stiglitz? "Tribulation"? This is news!
Jimminey...I'm not happy with him for exactly what I said, but how does he get to be bogeyman No. 1 ????
Jonathan S
I can't disagree with those two points, especially number 2.
Interestingly enough, today watching DemocracyNow, Greg Grandin, a professor of Latin American History at NYU, speaking about the new Brazil President (hand-picked by Lula da Silva, the outgoing President,) and Brazil's challenges for the year ahead, said that Brazil would have to enact austerity measures in social programs in order to control its interest rates. (I kid you not.) Take a look see for yourself: http://www.democracynow.org/2011/1/3/brazilian_president_dilma_rousseff_from_imprisoned (around minute 44:00)
Stiglitz opposed Summers and Rubin most of the times as did Robert Reich. Stiglitz had no part in the repeal of Glass-Steagall. Reich and Stiglitz were against all the deregulation.
Stiglitz quoted below:
"The next issue that came very much to the fore was the issue of repealed Glass-Steagall Act. While I was chairman of the Council of Economic Advisers, that didn't go through. It happened after I left. I opposed it very strongly. I thought there were good reasons why we had passed Glass-Steagall in the aftermath of the Great Depression. You look at the history, and it was clear that the quarter century after World War II, in which we had strong financial market regulations, is that one quarter century in the world in which there was almost no financial crises, no banking crises. It was also the period of most rapid economic growth, and it was also the period in which the inequalities in our societies were being reduced. So it was very hard to say that these regulations had stifled economic growth."
Whores provide a service, economists do not.
Stone:
Interesting you should mention whores. I was recently linked to a very good article on political/economic whores and pimps. You might like to read it: http://www.washingtonsblog.com/2010/03/82-of-americans-clamp-down-on-wall.html . It makes good sense.
how do you turn an entire living planet into product and waste, and still have a living planet?
you don't...
and the word 'economy' doesn't change that...
The hamster wheel we have been on measures our well-being by gross domestic output, stock prices and unemployment. These together say nothing about the quality of life or whether we are creating anything of value. That is how such cancerous diseases as Reaganomics could infect the world - it was all about measuring quantity (and manipulating the quantitative yardsticks) without regard to quality or fairness.
It is a time for us to consider a different road where sharing and making sure the basic needs of everyone are met are the priority. Not making the old measuring tools give us happy readings.
"Money multiplied by money contributes to the stress of modern life. Money is not the priority; sufficiency is the priority. When sufficiency becomes the priority, it orders society in a
different way, creating stability. In this regard, sharing is both a moral value and a method of implementation.
This will create a more peaceful atmosphere, in which people will not struggle to make millions. They will fulfill their duties, care for their families, and children will be able to evolve."
- World Teacher Maitreya through an associate as released to the media by Share International
The fundamental problem is that people in the prosperous nations believe that it is natural to own 30 T-shirts or thirty dresses and use a 5-seater car as a mean of transport for one person for ninety percent of the life of the car. This mentality of greed plus the attendant conviction that one can always gets more out of the system than what one puts in if one is smart enough, naturally leads our ignorant populace to trust the "Geniuses of Greed", the Capitalilst that is, to fulfill our dreams. This same conviction leads them to place their trust in politicians and other cultural and societal leaders whom they already know all too well are in cahoots with the "Geniuses of Greed". In other words they beieve in GREED for themselves and for others in the same country
Financial wizardry, "outsourcing", invasions of foreign land and wars, under-paying immigrant workers, etc., are all natural and logical, as they believe these are all necessary parts of the Greed system. It is also OK if austerity is just for 6 months or at the most until the next political carnival, called "election", and then things go back to "pre-disrruption" normality. All we need is a little tinkering made to the system by a certain "Obama", "Bernanke" or "Sarah Palin". GREED, the INVISIBLE HAND is mightier, fairer and certainly more rational than GOD
"Austerity" seems to be little more than a right-wing neologism for what normal people call "theft", and it seems to me that we play into their hands by continuing to use the word as though it refers to some moral form of behavior or something.
It just means that Americans still have some wealth that they're not done stealing yet.
its a distribution of wealth problem pure and simple
reward hard work yes, but that is not happening
so social programs are created to prevent mass sufferings and societal breakdown
they are designed to redistribute wealth so that people can have the basics
screw rush limbaugh, sean hannity and glenn beck
they are whores, with no human compassion
bush said that those who pay the most taxes should get the biggest tax breaks
lets apply this to austerity
those who have the most should have give up the most
lets start with zero interest loans that the big banks get
which they turn around and give back to government to buy treasury bonds at 4 percent or more so we the people owe them interest
any other things they should give up?