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.

Denmark: Kickstarting the Economy?

After the American Century

A few words on the depressing state of Danish politics. For weeks there seem to be two stories. The first is that the ruling coalition is unable to define and put through its pet project, one of no interest to the majority of the country outside Copenhagen, namely to charge drivers tolls when they drive in and out of the city. This should not be a national issue. It should not be a headline every day, as it has been. It should not clog the radio waves. But the government did not have a clear plan when it began,  the coalition is not united, and the government is so myopic, it takes an enormous interest in all things to do with Copenhagen. Even worse, it now appears that after months of wrangling, nothing will be done except to find a new tax somewhere, no doubt paid by all Danes not just those in Copenhagen, so the city's bus fares can be reduced instead. Pathetic politics. Disturbing lack of perspective.

The second political topic is more general, namely that so many Danes are unemployed or otherwise living on some form of state subsidy. Before the election, the now governing coalition proclaimed that they would "kickstart" the economy by spending more money on all sorts of wonderful projects. Most of them would be projects that needed to be done anyway in the next decade, but they would be moved forward. Kickstart! We heard that word every day during the campaign. Once they got elected, however, the new government discovered that they could not spend more money without creating a larger deficit than was acceptable to the EU. This was awkward with Greece tottering on the edge of bankruptcy, especially as Denmark took over as temporary leader of the EU from January to June of 2012. So instead, the government has been busy kicking various groups in the face. They have not kicked them literally, of course, but one group after another is being blamed for draining the public coffers. The government has attacked the old for retiring too soon, the young who are not getting an education, the unemployed (even though more than 150,000 jobs have disappeared), the hospitals for being inefficient, and so on. 

The real meaning of "kickstart"

The new target is the universities. It is suddenly their fault that the young are not working. They are accused, rather vaguely, of not training people in the right fields. The rather absurd argument is that new graduates - who began their university education in 2006 during a world-wide boom and cannot find jobs today during a European bust - would have gotten jobs if the universities had done something (what exactly is not clear) differently. In 2006 the former government pressed universities to take in as many people as possible. The headlines then insisted that there would soon be an acute shortage of labor as the baby boomers began to retire. One "expert" after another proclaimed that there would be a dire need for highly trained people. Denmark would not have enough school teachers, gymnasium teachers, university lecturers, and researchers. It would need to import thousands of people from abroad to staff its hospitals and to keep its industries competitive, And so on.

The students who began in 2006 are emerging with their MA degrees into a much different economic situation than the one predicted. The government is forcing older people to work longer before they retire. It is firing hundreds of school teachers. It is firing lawyers and economists from the ministries. It is generally cutting budgets, like most other European countries. And in this situation the new graduates are not finding work. But it is more than absurd, it is hypocritical and beneath contempt for the government to blame the universities for unemployment. They have trained people as they were asked to do. It takes 5 or 6 years to do the job. During those years the world was convulsed by an economic contraction. Jobs disappeared, but the Danish universities were not responsible for that.

More generally, the government got itself elected by sounding as though they would adopt a Keynesian economic policy. It claimed it would kickstart the economy through deficit spending, as Roosevelt did in the United States during the New Deal or Kennedy did in the early 1960s. But once in power the new government proved to have quite a different economic policy. They are in fact going to run the Danish economy more according to the Chicago School, or the Milton Friedman brand of economics. I wish they would listen to Paul Krugman, the Nobel Prize winning economist whose articles in the New York Times continually have criticized the EU for adopting cutbacks as a "cure" for weak economies. This policy resembles the ancient practice of bleeding patients who are ill.

Deficit spending therefore is not on the Danish agenda. Instead of a kickstart, apparently it is time to cut the budget and kick the victims. So, blame the unemployed, blame the young, blame the pensioners, blame the universities, and believe it or not, to some extent even blame the handicapped and the mentally ill. 

This is a socialist government in name only.