Wednesday, April 18, 2012

Will inflation save Europe?

In a recent column, Paul Krugman says that Europe essentially is committing "economic suicide" with its various "austerity" programs, with the only thing that can save the Continent being inflation. While I can agree with him in part that "austerity" programs as outlined by the European Central Bank can be harmful to economic growth, the idea that inflation is the magic elixir that turns bad economies into engines of prosperity is pure snake oil.

Krugman writes:
So if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is actually fairly clear. The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times. But at least there would be some hope of recovery. (Emphasis mine)
 How much inflation? Krugman does not say, although he should know that once a government goes down the inflation path, it needs to apply increasing amounts of inflation over time to get the same effects. The history of inflationary episodes is quite clear on that point.

However, at the same time, we have to understand just what is meant by "austerity" in the European sense. The ECB (with the Federal Reserve System lurking in the background) has engineered a bailout of the banks that lent these governments lots of euros, and in order to now pay back the loans, the governments must cut spending and raise taxes.

Cutting spending, contra Krugman, is not necessarily contractionary, although European governments impose heavy costs upon business, making it harder for businesses to be an engine for recovery. Krugman mentions Spain and its near-24 percent unemployment. What he does not say is that Spain has some of the most restrictive employment regulations in the world in which employees, once hired, pretty much have something akin to tenure, which means employees pretty much cannot be fired for any reason.

Under that set of incentives, when businesses find the back door nailed shut, it means that the front door is much harder to open. Unfortunately, people like Krugman cannot see such policies as having any effect upon employment rates in Spain because they tend to see government employment as morally and financially superior to private employment, so that if Spain makes it difficult for businesses to hire people, then let government "pick up the slack."

There is an underlying issue that Krugman cannot see because of his anti-enterprise ideology. For many years, Europeans have looked down their noses at the USA because it has not had the same restrictions on businesses as Europe and the USA's welfare state is not as vast as that on the Continent.

Yet, such restrictions and heavy spending have made it more difficult for businesses to generate real wealth, which ultimately has translated into slow growth and high unemployment. Unfortunately, the current spate of "austerity" programs fails to recognize how new wealth can be created and what it really would take for Europe's economies to grow.

Krugman, however, would have none of that. His message to Europe is simple: keep the restrictions on business in place, increase government spending, and print money, lots of money. Such actions in the present might mask the underlying problems, but in the long run, it would be disastrous.

But to Keynesians such as Krugman, it doesn't matter. In the long run, all of us are dead.


Pulverized Concepts said...

The more restrictions government puts on private business, and the more expensive it makes life in general, the more of the economy that moves into the black market. In the case of Spain, watch a couple of Pedro Olmodovar's movies, everybody is hustling for a buck but not in the restricted, government-authorized system. We're seeing dramatic proof of that in the US as well, services that were once provided almost exclusively by licensed businesses are being performed by private individuals with far less overhead. Plumbing repairs are a good example. And as these activities expand, tax receipts fall. The government is hurting not only itself but the populace as well.

Pete said...

Krugman does not say, although he should know that once a government goes down the inflation path, it needs to apply increasing amounts of inflation over time to get the same effects.

THIS right here is the most important lesson everyone has to learn about inflation.

So many pundits - I mean economists - believe that the same inflation has the same effect on the economy, when money is not neutral, and has declining effects just like any other scarce good.

It might be a very desirable scarce good, it might get people to maintain a distorted economic structure for quite some time, but the piper's price will keep increasing, and not all nice and linear manner, but rather in a volatile, yet accelerating manner.

Sovereign states around the world were viewed as, indeed they are, the last vestige of maintaining the illusion, the neoPonzi scheme, of inflation going.

Just consider. Prior to states, the belief was that housing and real estate could "back" the neoPonzi scheme. National level home prices have never declined, so they were viewed as the ultimate backing. That illusion was of course dashed.

The new illusion is that state debts are the optimal backing. The tragedy is that there are all sorts of fringe crazies coming out of the woodwork, like MMTers, who are functionally acting as Nazi psychologists and doctors, brainwashing themselves and trying to brainwash others into believing that because states can print their own money, all talk of financial trouble is somehow a red herring because people can just put the new illusion of backing the neoPonzi scheme on state debt. After all, states can always pay you back by simply printing the interest and principle. All of society's "excess savings" can be backed by state debt!

With the world's investors "all in" on sovereign state debt, which central banks around the world are doing everything they can to foster by buying state debt themselves, once the chess pieces are all put into place, then after the sovereign debt bubble leads to prospects of either hyperinflation or worldwide deflationary depression, that is when the push for a worldwide currency will probably be "suddenly" advanced as a "new idea", that has to be enacted "right away", to "save the world from collapse."

Nick Rockefeller once told Aaron Russo that the ultimate goal of the central bankers is to implant everyone in the world with an RFID chip, which contains their personal identification, and money. And if they do not comply with this, their chips will be turned off and they won't be able to buy or sell. This was right after Rockefeller told Russo, 11 months before 9/11, that there is going to be a false flag event sometime in August or September, that is going to get US soldiers into Afghanistan and Iraq.

Dennis said...

Many countries in Western Europe as well as the U.S. already have what would normally be considered "somewhat higher inflation", yet unemployment levels are still stalled or growing, and the general pace of economic activity remains moribund. Krugman is too dishonest to say what he would consider "adequate" inflation out of the belief that if you don't make precise predictions, no one can ever claim you were wrong.

Raoul said...

”However, at the same time, we have to understand just what is meant by "austerity" in the European sense.”

The capital question, indeed. For a long time, European governments refused to see their financial problems. So, when it was no longer possible not to say anything about the debt issue, they imagined the trick of changing the meaning of “austerity”. In the libertarian meaning – that is, in the real meaning – “austerity” means “austerity-for-the-taxeaters”, i.e. less public spending. Now, it means austerity-for-the-taxpayers, i.e. more public resources. The worst is that, when additional problems will occur due to theses taxes rises, government will say “obviously, libertarians solutions don’t work…”.

William L. Anderson said...

Note that the "austerity" programs are little more than governments being used to collect maximum payments for banks.

macroman said...

"but to keynesians ,,, it really doesn't matter. In the long run we are all dead."

I think you and your admirers would profit from reading the entire quote from Keynes which ends with "in the long run we are all dead". It doesn't say what I, as a naive Hazlitt admirer, thought it meant, and what you make it mean above. It is much interesting, and thoughtful. Keynes was actually accusing classical economists of being myopic and Panglossian

Raoul said...

On ECB's views on the inflation problem, you absolutely need to watch this video. It's is amazing.

If you believe it, the "inflation monster" is something independent of the ECB's action, something which comes from the outside and against which ECB have bravely to fight.

The anthropologist René Girard described in a book some primitive tribes who believed "violence" was something of them and independent of them. He met the same phenomenon in the Greek tragedies. He could have studied it in ECB propaganda as well.

Anonymous said...

It is not true that Spain has one of the most restrictive employment regulations in the world. How can you explain then that we have so much unemployment. Many people gets easily fired. We have a very low minimum salary, 8 days per year are paid to the young employees when they are fired. Real salaries haven't increased since 2001, and prices are 30% higher (so profits for firms were not that bad during these last years). Now aggregate demand is like our salaries, poor. But you blame the protection and condictions of the workers. This is ridiculos. I guess your school of economics would like slave-flexibility labour markets.

Dennis said...

Krugman says here 3-4% inflation in the total of the Euro-zone.

"Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany)."

Here he explains why Germany needs an even higher inflation: