Waving Buh Bye To Austerity

It's not surprising that Europe is finally ejecting austerity from the capsule and moving on to an economic policy rooted in reality as opposed to unicorn, fairy land.

The ECB’s new stimulus “should strengthen demand, increase capacity utilization and support money and credit growth,” Mr. Draghi said. He rejected any criticism that the vast expansion of the ECB’s easy-money policies would stoke inflation down the road, noting that inflation has stayed very low even after several interest-rate cuts and abundant ECB loans to banks. “There must be a statute of limitations for those who say there will be inflation,” he said.

Yeah, that was passed by a long time ago...

Equally not surprising is the recent vote in Greece firmly against austerity.

Greece currently has public debt equivalent to 177 percent of its gross domestic product (GDP). Its unemployment rate stands near 25 percent overall, and more than half of young adults have no jobs and few prospects. The austerity measures have gutted many of the country's most vital social programs. The economy has shrunk by more than 23 percent since the 2008 global financial crisis, a contraction comparable to the U.S. economy's during the Great Depression.

Austerity in times of economic contraction doesn't work. It never has. The only question that remains is when this shift in policy produces results, will the pathological haters of government finally admit fault?

Busted!

Over the course of the last few months, we've seen that austerity measures in Europe aren't working. One would think that they learned their lesson after the worldwide economic depression in the 1930s but they haven't. Neither have conservatives in this country who are so emotionally obsessed with the government spending less money that they really can't see how cuts in spending are harmful. Now we have the proof that not only are they harmful, they are decidedly not beneficial. In short, high public debt does not consistently stifle economic growth.

Thank you, Thomas Herndon!

Who Will Take That First Step?

When someone like John H. Cochrane, a professor of finance at the University of Chicago Booth School of Business and an adjunct scholar of the Cato Institute, says the following

Austerity isn’t working in Europe.

We should ALL listen.

His recent piece for Bloomberg  offers some rare flexibility from the right that is worth noting. He begins by noting a very basic reality.

As incomes decline, tax revenue drops, and it becomes harder to cut spending. A downward spiral looms.

This is the crux of why we should all be concerned about flat lining middle class incomes.

He goes on to point out that spending more (something that I have also said) is not the answer.

Where will the money come from? Greece, Spain and Italy simply cannot borrow any more. So, say the Keynesians, Germany should pay. But even Germany has limits. The U.S. can still borrow at remarkably low rates. But remember that Greece was able to borrow at low rates right up to the moment that it couldn’t borrow at all. There is nobody to bail out the U.S. when our time comes. What should we do then?

Also, a very good point. So what's the solution?

Let’s call it “Growth Now.” Forget about “stimulating.” Spend only on what is really needed. We could easily stop subsidies for agriculture, electric cars or building roads and bridges to nowhere right now, without fearing a recession.

Yep.

Rather than raise taxes further on the “rich,” driving them underground, abroad, or away from business formation, fix the tax code, as every commission has recommended. Lower marginal rates but eliminate the maze of deductions.

I could live with that. It has to be done anyway. Of course, there are difficulties.

“Structural reform” is vital to restore growth now, not a vague idea for many years in the future when the stimulus has worked its magic. It’s also a lot harder politically than the breezy language suggests. “Reform” isn’t just “policy” handed down by technocrats like rules on the provenance of prosciutto; it involves taking away subsidies and interventions that entrenched interests have grown to love, and have supported politicians to protect. They will fight it tooth and nail.

That includes D's, R's and everyone in between.

So, we know what we need to do. Who will be the first person to lead on doing it?