Government Isn’t the Problem…and Austerity Isn’t the Answer

I have a friend who witnessed about half of the Supreme Court arguments on the Affordable Care Act. When he walked out of the courtroom, he wasn’t surprised to find a sea of people protesting the law. What did surprise him was how many of the protest signs were anti-Europe. Apparently, the protestors were worried that universal health insurance was the path to “becoming European” and all the nefarious consequences that implies.

If asked for their opinion on government spending to stimulate the economy, I imagine they’d give roughly the same answer.

But the truth is that fiscal irresponsibility has little to do with Europe’s current crisis.

Just before the recession hit, the European governments with the highest public social spending (relative to the size of their economy) were France, Austria, Belgium, and Germany — none of the so-called “PIIGS” nations that are in trouble. In fact, many conservatives have anointed Germany as the role model that its neighbors should emulate.

Even if you measure all government spending in the middle of the crisis, there is no correlation between a country’s public spending and the interest rates on its sovereign debt (which is the key indicator of financial distress).

From 1999 to 2007, the European government with the highest budget deficit (again, relative to economic output) was Slovakia, hailed by conservatives for its flat tax. France’s budget deficit was about as big as Italy’s, and Germany’s was close behind. Spain and Ireland actually had budget surpluses.

Besides, if government spending were the problem, then the crisis should be over by now. The EU and the IMF have forced the PIIGS nations to slash public expenditures — and the recession has only gotten worse.

Compare that strategy with what happened in the United States, where we took the opposite approach and increased public expenditures.

In the fourth quarter of 2008, real GDP contracted at an annual rate of 8.9 percent in the U.S. In January 2009, nonfarm employment declined by over 800,000. That was the lowest point both statistics — growth in economic output and jobs — would reach.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA), better known as the “stimulus” package.

In the first quarter of 2009, real GDP contracted by 6.7 percent. In February 2009, nonfarm employment losses were closer to 700,000. The recession was clearly not over, but the bleeding had slowed.

On March 6, 2009, the Dow Jones reached its cyclical low of 6,626.94. The next day, it began a strong recovery.

By the third quarter of 2009, when the stimulus money was starting to be spent, the economy was growing again. By March 2010, job growth was positive again. (Job growth always lags behind economic output.) By February 2011, two years after Congress passed the ARRA, the Dow Jones cleared 12,000.

Clearly, the ARRA was the turning point. Its passage was the beginning of the end of the Great Recession.

Coincidence? Perhaps.

But isn’t it odd that none of the critics’ predictions came true? They warned that interest rates would skyrocket with the government borrowing so much money. Instead, interest rates plummeted. They warned that inflation would soar. Instead, it’s been low and stable.

And that’s not all. Several economists have measured the effect of the stimulus since it was spent. Two Dartmouth researchers, for example, compared jobs growth in each state and county to the amount of stimulus funds spent in that state or county. They found that every dollar spent on the poor yielded two dollars in increased economic output, and every dollar spent on infrastructure yielded $1.85 in output.

Another study compared jobs growth in each state to the amount of federal Medicaid matching funds spent in that state. They found that each dollar spent yielded two dollars in output. A similar study found that the ARRA “created or saved about 2 million jobs in its first year and over 3 million by March 2011.”

So it’s no surprise then that Europe continues to flounder while America continues to grow. You can’t beat a recession by cutting government spending. Even Mitt Romney said so.

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This op-ed was published in today’s South Florida Sun-Sentinel.

What to Read on Dominique Strauss-Kahn

How Power Corrupts — Jonah Lehrer

Psychologists refer to this as the paradox of power. The very traits that helped leaders accumulate control in the first place all but disappear once they rise to power. Instead of being polite, honest and outgoing, they become impulsive, reckless and rude. According to psychologists, one of the main problems with authority is that it makes us less sympathetic to the concerns and emotions of others. For instance, several studies have found that people in positions of authority are more likely to rely on stereotypes and generalizations when judging other people.

In the IMF Succession Battle, a Stench of Colonialism — Moises Naim

…only a European can become the new managing director of the IMF, an institution owned by 187 member nations. This arrangement…effectively discriminates against 93 percent of humanity…
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Influential European columnists such as Martin Wolf and Wolfgang Munchau have argued in the Financial Times that given the IMF’s critical role in the rescue of the continent’s troubled economies, only someone with vast political contacts in the region can operate effectively there.

Funny how such consideration never seemed to come up when Asia and Latin America had their own financial crises in the 1990s.

The IMF: Violating Women since 1945 — Christine Ahn & Kavita Ramdas

IMF-mandated government cutbacks in social welfare spending have often been achieved by cutting public sector jobs, which disproportionately impact women. Also, as social programs like caregiving are slashed, women are expected to take on additional domestic responsibilities that further limit their access to education or other jobs.

In the Democratic Republic of Congo (DRC), IMF loans have paved the way for the privatization of the country’s mines by transnational corporations and local elites, which has forcibly displaced thousands of Congolese people in a context where women and girls experience obscenely high levels of sexual slavery and rape in the eastern provinces.

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The Ethical Investor: December 2010

Everyday, the hedgehog walks through the forest. And everyday, the fox comes up with a new way to attack him. (Foxes are clever that way.) And everyday, the hedgehog rolls into his protective shell, and the fox fails. “The fox knows many little things,” concluded the ancient Greek poet Archilochus, “but the hedgehog knows one big thing.”

In this example, which philosopher Isaiah Berlin made famous in a 1953 essay, the hedgehog is superior, at least in a survival-of-the-fittest sense. But according to social scientist Philip E. Tetlock, in the human world, it’s the reverse.

Berlin used the two animals to classify great thinkers. Plato, Dante, and Hegel were hedgehogs. They each centered their philosophies around one big idea. Aristotle, Shakespeare, and Goethe were foxes. They saw the world in a more complex light — or, alternatively, they plucked insights from many different fields.

Tetlock used Berlin’s classification system to test today’s “experts” in his 2006 book Expert Political Judgment. He found that, while most experts are poor predictors, the “foxes” were correct more often. If you’re trying to predict the future, it turns out, you’re better off knowing many little things, rather than one big thing.

Now for the apology.   Continue reading “The Ethical Investor: December 2010”