Mashed Potato Bulletin

A journal grappling with the mish-mash of American politics

Brian Carter

Brian Carter
Location
Northern, California, USA
Birthday
October 23
Bio
My professional and academic background is fairly broad including a Bachelor's in Cultural Anthropology, a Master's in Environmental Science along with a hefty injection of world history in the mix. Professionally, my experience is in public health and environmental health where I have been lucky enough to work with people from varied backgrounds and cultures. I started the Mashed Potato Bulletin to explore answers to questions not being asked and to insert, hopefully, a broader perspective into the current conversation. ----------------------------------- http://mashedpotatobulletin.com/

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Editor’s Pick
APRIL 24, 2012 4:13AM

Europe's Woes Prove GOP Wrong

Rate: 5 Flag

     Anyone frustrated with the drawn out economic recovery here in the US should cast a gaze across the Atlantic for a view of how it could have been. In the European Union we have a unique opportunity to catch a glimpse of where this country would be had we chosen the path of severe spending cuts rather than a road stabilized by economic stimulus.

      Throughout Obama's presidency his economic policies have been relentlessly criticized. Even now, as the recovery strengthens, many claim the economy is improving despite Obama's policies or that recovery would have been faster without the government's constant interference. The problem with these claims is there's simply no way to verify them, there is no way to test the alternatives. The only empirical data available are from actions already taken. All too often in the social sciences like economics, one has to rely on models which attempt but cannot fully account for the multitude of variables in the real world. Researchers, unfortunately, cannot directly experiment on actual economies which leaves statistical modeling as the best, and only, alternative. That is until now. 

      Europe's problems have provided economists a opportunity of sorts. They have offered up a unique chance to compare two sides of the economic ideological coin, a chance to see the results of both strategies tested on the real world and played out upon the same economic crisis stage. Unfortunately for one side in particular, the findings do little to validate their position.

       In order to shore up their financial situation, Europe chose to focus on their accumulating debt which grew significantly during the Great Recession. The EU decided on the austerity route, drastically cutting spending similar to the plans presented by the congressional Republicans in the US. They felt attacking the national debt was the prudent manner in which to stabilize their economies and place them on the path to fiscal recovery. The problem with this tactic is its misplacement of priorities. Debt reduction is a long-term goal requiring long-term policies inappropriate for addressing the short-term needs of an economy precariously balanced on a thin fiscal ridge. Solutions designed to bolster the EU's collective economies was essential during those critical recovery years and that required government intervention and investment, it required government stimulus.

      Unfortunately for Europe, the problems created by the misplaced priorities are now evident. In his assessment this past weekend CNN's Fareed Zakaria, discussed the dismal outlook for the EU. A recent US poll indicated people are still frustrated with the pace of the recovery but Zakaria, who just returned from Europe, says, “...they think America is booming.”. Compared to the eurozone's less than 1% growth and Spain's official entry into a double-dip recession, the United State's estimated 2-3% growth this year nurtures an economic certainty Europeans have yet to experience. 

       While Europe employed across the board spending cuts and tax increases to curb their debt, conservatives in the US demanded massive spending cuts and additional tax cuts. As we have seen in Europe, and to a lesser extent here in the US, those cuts in government spending sent people to the unemployment lines, which further reduced tax revenue and consumer spending. Decreased consumer spending reduced demand for goods and services which in turn reduced private sector hiring and overall confidence in the economy. The US received a taste of what the eurozone's debt reduction strategy felt like during the debt ceiling debacle this past summer.

       When the debt ceiling battle began heating up in May of 2011 the private sector had been creating thousands of jobs for 12 consecutive months. By June that job growth had slowed, and continued to through September, due in large part to congressional gridlock and Tea Party freshmen threats to allow default if spending cut demands were not met. With the subsequent downgrade of the US's credit rating and poor economic predictions, economists' concerns for a potential double-dip recession grew. 

     After a better than expected 4th quarter and strong 2012 opening, the double-dip recession worries eventually faded. Now, the US is on track for stable growth as unemployment drops and hiring continues, with a number of states improving faster than the national average.

      However, even with the straightforward evidence at hand, the Paul Ryans and Mitt Romneys of the political world continue to pursue the path of austerity. Both versions of Representative Ryan's fiscal plans and all 3 of Mitt Romney's base their budget balancing on cuts to much needed social and safety net programs in order to pay for additional tax cuts for the highest earners and significant increases in defense spending, all of which places added financial burden on the middle and poor classes.

       Europe's economic system is often used by the GOP as a derisive comparison for Democratic economic policies but this time that system may contain a lesson in humility the Republican Party should take to heart. Europe is proof positive that austerity as an economic recovery strategy does not work. The question is now, will this experience produce a little soul searching, a tail between the legs moment for the Republican Party or will they continue to ardently adhere to their fiscal ideology in stubborn denial of real world evidence?

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Good post and you might have a very good point there.
Thank you Sheila. Hopefully, it brings up some worthwhile questions.
We need Rooseveltian work programs, programs as I suggested in another comment for new grads, programs for older adults who can still contribute and don't have enough income for food and medicine, programs for middle class former manufacturing workers who can help on our infrastructure.
Great post. It should be a no-brainer, but what do you do when the people who should be listening have no brains?

Rated.
Ha apparently it takes years or decades to "save" America from Bush's economic programs but after only a few months the efforts in Europe are decried as a failure.

Good one!
Amy A> I completely agree. Obama has been pushing for these programs for some time. I'm not sure of the status of them given the gridlock but it seems some career change education programs have gotten off the ground.
It's amazing that common sense programs like these are objected to so vehemently.
Alan Nothnagle> I am a bit surprised this connection hasn't popped up somewhere in the media.
Harrison P> I suppose the simple comparison would be that Europe is in significant danger of a double-dip recession (Spain just entered there's) and the US is not, given it's growth and stregthening recovery.

The differences between the two was one took the austerity route while the other decided on stimulus. Over the same amount of time during the same economic crisis, it seems austerity is the strategy that didn't work.
Brian, Europe has beeb on a stimulus ride for 50 years. That's coming to an end now. That's the difference.

And any US recovery is in spite of not because of stimulus.

Governments don't create jobs, investors do.
Harrison, thank you for your comment.

Europe like the US hit rough times because of the recession not because of the "50 year stimulus ride"

The government does create jobs within itself. There are plenty of people employed in good, rewarding government jobs. Government also fosters the environment to create more opportunity in other sectors. Investors do not create the jobs nor do they lead the way out of recessions. This has become apparent ever since the recession and before in previous attempts with trickle-down economics. That didn't work either. Consumer demand is the primary driver for expansion and new hiring. Bottom-up is what works. Stimulus, in recoveries like this one, invigorates the economy from the bottom-up, creating or securing existing jobs, keeping money in consumers' hands which maintains or increases demand. Demand is ultimately what businesses and "investors" depend on. Once the recovery reaches a sustainable level, the private sector can take over their more influential role once again.

I know during times like there is an immediate hatred of government, believing everything it does is bad but that is simply a symptom of the current situation. But believing that the economy is recovering in spite of the stimulus is just denial of the real world situation.
Actually that's untrue. If you look at economies like Greece you will see that Government spending on its population is something which their economy couldn't afford. Same with Italy. Same with Spain. Germany is an exception because of their manufacturing base. They are top among exporters in the world. Their population also doesn't go into debt. They are an anomaly in Europe.

All of these failing Socialist nations were essentially borrowing money from their EU partners and using accounting tricks to stay alfoat. Economic times turn bad and it sent them over the edge but was not the cause.

Boosting Government spending over many decades by economies that could ill afford them is why they are doomed.
Harrison> You're missing the point here and of my posting. I am talking about stimulus as a measure to reinvigorate an economy to pull itself out of a recession. It's comparing the two very different responses to an economic crisis. I'm not talking about long-term spending.

The spending you're talking about is a wholly different topic. Although I will say that government investment in the public sector and partnerships created between those two areas does and has created a significant amount of progress, jobs and economic stability. This is common practice in the US but unfortunately It's being demonized now due to the poor economic times.
Japan tried massive stimulus in the 1990s... it failed.

Obama lover Paul Krugman castigated Japan for having done what they did. Surprisingly, once Obama pushed for the stimulus, so did Krugman.

The stimulus here failed... it was swallowed up be inefficient local governments that used the cash to temporarily plug budget holes which were never reformed as a result.

Stimulus didn't work in Japan, it didn't work here, it never really works. Didn't work in the Great Depression... just lengthened the time we were in it.

Here's what FDR's treasury secretary said before Congress about his boss' stimulus in the 1930s:

“We have tried spending money,” Morgenthau lamented. “We are spending more than we have ever spent before and it does not work. We have just as much unemployment as when we started. … And an enormous debt to boot!”

Here's what a 2004 UCLA study of the Great Depression found:

“Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx

Stimulus NEVER works.

Never.
Okay Harrison, this is going to be my last comment here with ya. I've got other things to move on to.


“The stimulus here failed...”

No I'm sorry but it didn't. It has been reviewed numerous times by various economists and all indicate it did do a lot to keep us out of a depression and to stabilize the economic free-fall. It also shored up state economies keeping people on their jobs there.

9 studies are reviewed here and the majority of them found the stimulus under Obama positively impacted the economy and unemployment.
http://www.washingtonpost.com/blogs/ezra-klein/post/did-the-stimulus-work-a-review-of-the-nine-best-studies-on-the-subject/2011/08/16/gIQAThbibJ_blog.html

In addition, in congressional testimony in January of 2010 the chairman of the CBO testified that the Stimulus bill and the actions by the Federal Reserve “....reduced the longevity and severity of the recession”.

Politifact has reviewed the claim that the Stimulus failed numerous times and have never found truth in it; http://www.politifact.com/virginia/statements/2011/jun/03/eric-cantor/cantor-says-stimulus-failed-get-people-back-work/

Could it have been managed better...20/20 hindsight, Yes it could have been. It could have done better with more targeted fundings instead of the shotgun blast type of distribution. But given the immediacy of the situation, there was pressure to just get it out there and working.


“Stimulus didn't work in Japan, it didn't work here, it never really works”.

I'm not familiar with Japan's situation at that time so I'm not going to get into it. I don't have time to dive into the research.


“Didn't work in the Great Depression... just lengthened the time we were in it.”

I've seen the UCLA study before and the problem with it is they do not account for the double-dip recession that hit in 1937. They just run it all together. Actually a number of economists believe the Depression was technically 2 recessions rather than one depression. But that is another topic. It was the double-dip recession that increased the longevity of the overall depression. It was caused by a retraction of government spending after the improvements made during the the first part of the recovery. From 1933 to 1937 unemployment had dropped from 20.6% to 14.3%. That, in of itself, speaks to the success of the stimulative policies put forth. As the country entered 1937 it was deemed the economy was strong enough to pull back and let the private sector take over, so to speak, but once the spending was pulled back and various programs were eliminated everything began going downhill again. The government reversed itself and within a year or two things were improving once more. But unemployment did not return to pre-1937 levels until WWII.

You state that FDR's Treasury secretary Morgenthau derided the New Deal programs He was no fan of Keynesian economics so he didn't care for FDR's efforts. BUT he did say this in 1939 when we were still recovering from the double-dip, neglecting to consider the improvements before. It's also worth noting along with the unemployment drops I mentioned above that 1933 to 1937 the economy grew at a rate of 12%.

It's interesting to note too... the UCLA study blames all the “slow recovery” on labor costs and the expansion of unions through the National Industrial Recovery Act (NIRA) but they neglect to mention that those policies were functioning all through the time of the decreases in unemployment and increases in economic growth. If they were so detrimental then we should not have seen the vast improvements that were indeed seen. It is interesting though...once it was overturned by the Supreme Court in 1935, that 2 years later and combined with austerity measures in the run-up to 1937, we entered the double-dip.

“Stimulus NEVER works. Never.”

There's plenty to call this assertion into question.


Once again, thanks for the debate, I appreciate your comments.
No problem we will agree to disagree.

Thanks for your time.
Most Europeans I know, think our economy has gone down the toilet.
"A recent US poll indicated people are still frustrated with the pace of the recovery but Zakaria, who just returned from Europe, says, “...they think America is booming.”
So who are you talking about?
Better late than not read at all.
~rated~