The Failed Economics of Austerity in Europe, and its consequences in Denmark.

After the American Century

The way governments responded to the financial crisis of 2008 differed. In Europe, they pursued austerity. They held down deficit spending and cut government jobs. In the US this response was common at the state level, but the Federal Government pursued a different policy. It loaned money to the faltering automobile industry, which has now recovered. It sped up spending on infrastructure, and was not afraid to stimulate the economy. 

Now we can see the results. The US economy has recovered considerably, with unemployment falling almost continuously during the last five years. The economy has grown every year since 2009 when Obama took office.

Contrast almost any country in Europe, where economies are barely holding even or shrinking. The headlines years ago focused on Greece, Italy, Spain, Portugal and Ireland.  But now the austerity policy has begun to hurt the larger, stronger economies. Germany is struggling to keep growing. France is in recession. This is now much in the news.

But Denmark is also having economic problems. Its economy has essentially stopped growing, and even shrank during some recent quarters. According to the World Bank, the Danish economy shrank in 2009 by -5.7 %. Five years later it has not gotten back to where it was before the crisis. With growth of -0.4% in 2012 and + 0.4% in 2013, the Danish economy is flat. This failure of economic policy ought to be the focus of attention. 

But the ruling Danish politicians have mounted a massive campaign of distraction. They have managed to convince many journalists and much of the public that unemployment is high and that this is the fault of the universities. Both statements are false. The Danish unemployment rate is historically lower than for most of the last twenty-five years (see chart below.) 

The idea that the universities are somehow responsible for this non-existent unemployment problem is nonsense. The real problem is that the economy as a whole is stagnant and that few new jobs are being created. Moreover, the age of retirement is rising, so that replacement of the old by the young has slowed down. But no politician wants to admit that the economy is stalled. 

Instead, the "solution," the Ministry of Research claims, is to eliminate thousands of admissions to universities, especially in the humanities. But this is all nonsense. The number of unemployed in Denmark was much higher between 1990 and 2005 than between 2010 and the present.

Historically speaking, the number of unemployed is low, if one's point of comparison is any time except 2006-2008. The real problem is that the percentage of people working is falling, both because the economy is weak and because the population is aging.  Starting in 2009, the percentage of the total population that is working has fallen from 75% to 70%. That is a big drop, and that drop has little or nothing to do with the universities.

More generally, the European-wide crisis that began in 2008 was not caused by universities. Regardless of what students majored in, there just are not as many jobs available as there were in 2009. Eliminating thousands of university admissions in the humanities will not create any jobs, but it will create a cohort of uneducated, unemployed people. If 3,000 fewer people enter the universities every year, after a decade there will be 30,000 more Danes who never attended university. As a result, they will earn less, pay less in taxes, and be more often among the unemployed.

Why is the Danish press unable to see through this government PR campaign? The government's analysis of the problem is wrong, and the "solution" to the problem is wrong. Austerity will make matters worse, creating a stagnant pool of unemployable people.  

The total number of Danish jobs has declined, because the government has pursued an austerity policy. It should have listened to Nobel-winning economist Paul Krugman. He has written about this often, for example in 2012, when he said, "in Europe, as in America, far too many Very Serious People have been taken in by the cult of austerity, by the belief that budget deficits, not mass unemployment, are the clear and present danger, and that deficit reduction will somehow solve a problem brought on by private sector excess." He noted that "research by the International Monetary Fund suggests that spending cuts in deeply depressed economies may actually reduce investor confidence because they accelerate the pace of economic decline."

President Obama's administration listened to such advice, though I should note that Krugman suggested an even higher level of pump-priming than Obama practiced. As a result, the US economy has turned around. In contrast, the Danish politicians obediently marched in lockstep with the Germans, believing against common sense, as well as against the economic analysis of Krugman and others, that if all the European countries reduced spending  their economy would magically improve. 

The Danish government is incompetent in economics, but it is good at creating a distraction, and it has managed to blame the universities for its own mistakes.  As Professor Krugman remarked, with regard to widespread failure of austerity policies to produce the results they had predicted, this is  "a case in which rival theories made different predictions, the predictions of one theory proved completely wrong while those of the other were totally vindicated — but in which adherents of the failed theory, for political and ideological reasons, refuse to accept the facts."

When prophecy fails, a famous psychological study found, its adherents circle the wagons more tightly and re-embrace their mistaken ideas, convinced that someone or something else is responsible for the failure. Today, as Krugman notes, "the prophets of fiscal disaster, no matter how respectable they may seem, are at this point effectively members of a doomsday cult. They are emotionally and professionally committed to the belief that fiscal crisis lurks just around the corner."

The Danish government and its economic advisers are in this situation, and therefore they need to blame someone else for the failure of austerity. And so they blame the universities. The failed logic is that, if only the universities had trained 3,000 more scientists and engineers every year since 2008 rather than humanities students, then these 15,000 people would now be working. But the statistics clearly show that workforce participation has fallen 5% and that there are fewer jobs now than there were five years ago. Even so, the unemployment rate is lower than it has been for most of the  25 years since 1990, because there are more old people and fewer young people. 

Reducing the number getting a university education will not change these facts, but the Danish media seem unable to read statistics, to make elementary calculations, or to read alternative views. Instead of seeing whether there is any logic or statistical basis for the new government policy of austerity for the universities, the Danes have engaged in a heartfelt discussion of the value of the humanities and their place in the development of civilization. An interesting discussion, but it just adds to the confusion artfully created by the government, and it gets in the way of understanding the real situation, which is that the government's German-inspired economic policy has been a fiasco.

Can the EURO be Saved by Top Down Budget Controls that Start Next October? And Is Brussels Really Up to this Job?

The New EU Agreement May Not Work in Practice

After the American Century 

I confess that the Euro Crisis seems to me only temporarily "solved." Except for Britain, all the other countries seem ready to let the EU have a veto over their budgets.  Is this idea feasible or practical? I think it will prove unworkable, at the latest by November, 2013. I very much hope events prove me wrong, but I fear this was an ill-advised treaty based on panic diplomacy.

Assume this new agreement goes into force and try to imagine how it will work. Each autumn all 17 nations using the Euro (and some 8 or 9 nations who might someday use it)  will send their national budget to Brussels and then sit back and wait for weeks or more likely months to hear whether their budget is acceptable.

Brussels will need to have deep knowledge of each nation's domestic politics and economy, so deep that each budget can be evaluated fairly, and quickly. If a single committee of experts examines each of the 25 national budgets and gives just one day to each, it will require five weeks to review them all. That is too superficial a look and yet would take to long, so there would need to be teams of Eurocrats devoted to different clusters of nations. And what chance is there that different committees will all apply the rules in the same ways?

These 25 or 26 national budgets will be complex documents built upon political compromises and assumptions about how each national economy will do in the following year.  This year it took the Danes well over a month to come up with their budget, which began with horse-trading behind closed doors between members of the newly elected coalition. What if the technocrats in Brussels declare such a budget invalid? Who then decides where the cuts should be made? How long will decision making take? How will coalitions respond if Brussels imposes cuts that hurt one party in the coalition far more than others? Might not Brussels cause governing coalitions to collapse, forcing new elections, and leaving nations without budgets in the meantime?

Which economic theory will be used to provide the standard model?  And what system of national accounting will be used? All nations will need to use the same or very similar systems, one would think, otherwise it will be hard to apply the same rules in an evenhanded manner. Most nations will have to "translate" their customary budget into an EU-friendly form.

What will be the allowable margin of error - i.e. the allowable difference between annual projection and actual performance in the previous year? Will a nation that suffered a natural disaster, such as a flood or earthquake be fined for failing to meet expected performance targets?  What if the cuts favor banks rather than homeowners, or they hurt schools rather than hospitals? Workers rather than pensioners? Suppose an EU budget decision is controversial? Can it be appealed? Meanwhile, is a nation making an appeal unable to tax and spend until a decision is final? These are only some of the questions that come to mind. I cannot imagine such a scheme working in the real world. 

If we assume that the new arrangement is approved this spring, expect a bureaucratic circus in October and November, 2012.

I think the new treaty is a bad idea because
(1) it is a top-down control mechanism that will be unworkable.

(2) It is based on the idea of cutbacks everywhere as the solution, and does nothing to create jobs or foster growth, except growth in the Brussels bureaucracy.

(3) It does not focus on the international banks as a major part of the currency problem. The banks irresponsibly loaned billions of Euros to nations that could not repay their debts, and the new idea is to let the European Central Bank make those loans instead. I would rather see much tighter controls on the banks themselves, learning from the effective regulation of the Canadian banks who rode out the 2008 crisis quite well.

The Scandinavian countries, none of whom now have the Euro. should put a few people to work on Plan B: a common currency for Norway, Sweden, and Denmark. This would quickly be recognized as solid and secure. Compared to working with Brussels, it would be easy to administer. This particular Plan B has been discussed before and rejected. Would any Danish political party have the courage to explore this idea? Probably not now.

Wait until about 2013, when people see the complexities, inequities, and delays that come with a centralized Euro and top-down control of national budgets. By then, Britain may look like the smart one who opted out early.

Global Warming NOT the Only Problem with Fossil Fuels

After the American Century

During the next three weeks we will hear a great deal about the problem of global warming. I do believe that global warming is taking place, that the actions of human beings contribute to it, and that it lies within our power to do somethning about it. But put aside that entire discussion for a moment, and consider what other reasons there might be to cut back on burning fossil fuels.

Not all countries produce oil, coal, and/or natural gas. Advanced industrial nations that lack supplies are not coincidentally in the forefront of finding alternatives. Germany has virtually no oil or natural gas, and its more accessible coal has already been mined. Therefore Germany finds it highly interesting to develop wind turbines and solar power, and indeed has been one of the leading countries in both sectors for years. France, in much the same energy situation, has more nuclear power than any other nation. More than 80% of its electricity comes from nuclear plants. Sweden has no oil, and it relies on nuclear power and hydroelectric dams.

In contrast, countries like the United States and Britain which have oil fields and coal mines have been far slower to develop alternative energies. One can take this argument further, and say that within the US, places without fossil fuels like New England, New York, Oregon, and Washington are far more supportive of wind and solar energy than are states with coal fields. Montana, Illinois, Wyoming, and West Virginia together supply 55% of US coal production, and they are not supporting the shift to alternatives. One finds the same resistence to change in the biggest oil producting states, Texas, Alaska, and Lousiana.

Without going into arguments about global warming, it seems obvious that the current energy regime favors fossil fuel exporting regions and in effect imposes a tax on those who import oil, gas, and coal. Half a century ago the cost of these energy sources was so low as to be almost a negligable part of the total cost of production. This is no longer so. Fuel prices, over the long term, have risen and can only continue to rise as demand increases. Already in Russia, more than 20% of the gross national product (GNP), comes from oil and gas exports; in Nigeria 35%; in Venezuela 27%; and so on for all the major oil producers.

It is always a good idea to "follow the money." Most of the world's powerful economies - the US, Germany, France, Italy, Spain, South Korea, Japan, Australia, China, and India - are all net importers of oil and gas. The United States imports almost 12 million barrels of oil every day. Japan imports a bit less than half that. China imports "only" 2.9 million barrels a day, but this figure is rocketing higher, as its citizens now buy more cars every month than consumers in the US. The major industrial nations need alternatives, and in the next two decades they will probably develop them.

There is one other argument in favor of a shift to alternative energies. Quite simply, the world's reserves of oil, coal, and gas are not infinite. Why keep paying a premium to use someone else's well, when it is drying up?

Are There Any Good Investments Left?

After the American Century

In 2008 no matter where you lived, chances are you lost money. Houses lost value, stock markets fell most places by a third or more, and if you were unlucky enough to hold many British pounds or Swedish kroner then you lost an extra 20% compared to everyone else.

Perhaps the natural thing to do in 2009 is to put any of the money that is left in a savings bank and wait for the economy to stabilize. But most assets are not liquid. For example, few are eager to covert their homes into cash, as they are worth less now than a year ago, and they have to live somewhere. Likewise, people who have money tied up in pensions typically have to keep putting money in and they cannot take it out until they retire. In other words, most feel they have few options, other than holding on to their shrinking pension and their deflating house and hope for better economic weather. Many people I know are playing the lottery, just a couple of tickets, here and there. hoping to hit it big. They lose maybe $20 or $30 a month that way.

But the options are not all bad. For years I had trouble getting skilled workers to the house to put new tiles in the bathroom or make repairs, because there was so much other work to be had. When the economy cools off, these guys may actually show up, as they have promised to do several times over the last two years. This is a good investment, because I get to enjoy it, and the house keeps its value.

By a similar logic, people should buy art in troubled times. In part this is to help artists, but also I realized some years ago that by the time you purchase a good reproduction of a famous work of art and have it suitably framed, the cost is almost always more than $100. Yet after a year or two, I find myself tired of most such prints, and so replace it and find myself out another $100. Eventually, you have a closet full of nicely framed, somewhat faded copies of famous paintings. Worthless clutter that may easily have cost $500.

Instead, spend a bit more for a lithograph or painting that is authentic. I bought a lithograph on an impulse last week, for less than $200 (framed, too). It's better than lottery tickets, that usually lose all their allure in a couple of days. OK, the litthograph is not that large, but I once met the artist, so it feels a bit personal, and he has regular exhibitions. It is interesting to look at, and I am not likely to get tired of it, at least not soon. Also, there is a chance that it will still be worth something years from now. I am not saying go and buy art as an investment, because that is hardly a sure thing. But buy art rather than posters, and you get to enjoy it., and you will have more closet space. After a couple years, an art dealer may trade you for somethingh you are tired of, for something else.

There is a small hidden agenda in these two suggestions. If we all used a bit of money on home repairs and on art, it would help the local economy,. Why give the money to some charlatans who claim they know which stocks are going to rise in Asia or Eastern Europe or New York? Maybe you can frame stock certificates and put them on the wall, but will you really enjoy that?

For us small fry without fortunes, there are still good investments, things right in front of us, things we can enjoy for years. And I don't mean lottery tickets.