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(T)he insistence on balanced budgets or low deficits in Europe is costing the continent over $1 trillion a year in lost output (over $2,000 per person). Rather than spending money on improving infrastructure, education, health care and expanding the use of clean energy, the eurozone countries have been cutting back spending with the idea of getting their budgets closer to balance and lowering their debt-to-GDP ratios. These policies have also prevented millions of people across the continent from getting jobs.
The pain being experienced by workers across Europe is undoubtedly a factor in their hostility to immigrants and their turn to right-wing populist politicians. The deterioration of public services, like national health care systems due to needless budget cuts, has played an important role in this backlash as well. It is easy for right-wing politicians to blame immigrants for the deterioration in these services, even if the real problem is that said politicians' governments have reduced spending levels. After all, none of the mainstream politicians are making this point.
The austerity is altogether unnecessary because the evidence indicates that European governments could easily increase spending without hitting any constraints. The European governments are in the same situation as Bill Gates when he goes out to dinner: He can safely order anything on the menu without worrying about how he will pay the check. Similarly, in the current economy, European governments can increase spending to meet important needs and employ workers.
There are several measures that tell us European governments are not up against any real constraints. The most basic indication of a government running up against the limit of its ability to borrow is that it faces high interest rates on its long-term debt. The interest rate on government debt is currently extremely low across Europe.
The interest rate on 10-year treasury bonds issued by the French government is just 0.2 percent. The interest rate on Italian bonds is 1.1 percent. The interest rate on German bonds is -0.1 percent. That's right; you have to pay the German government money if you want to lend to them for 10 years. By comparison, in the United States in the late 1990s, when the country was running budget surpluses, the interest rate on 10-year treasury bonds was in the 5-6 percent range.
The other major factor to assess whether a country is running up against limits is its inflation rate. If an economy is overheating due to excessive government spending or any other cause, we would expect to see the inflation rate rising. We see the exact opposite across Europe, with the inflation rate remaining stubbornly close to zero in spite of the efforts of the European Central Bank to raise it towards its 2.0 percent target.
So if there are many great things that can be done with more government spending -- in addition to putting people to work, and low interest rates are an indication that the financial markets are begging governments to borrow money -- and low inflation means the economy doesn't face any constraints, what's the problem?...
The problem is that many people in leadership positions, especially those from Germany, cling to folk wisdom handed down to them from their parents or grandparents. They are told the story of the hyperinflation in Weimar Germany in 1920s. These leaders seem to hold the view that if we relax budget restrictions, even in a period of economic weakness like the present, we will soon be again confronting Weimar-type hyperinflation.
Of course, there is no logic to this position. There are many instances of governments boosting demand with deficit spending. Outbreaks of hyperinflation, especially in wealthy countries, are extremely rare. It would take a long period of reckless spending to push inflation to the point where it poses a serious problem for the European economy.
But even though there is no logic to this German view, it continues to be the basis for economic policy in the eurozone.
The Price of Austerity
Bill Gates to Fund Huge XPrize to End Austerity in Europe
(T)he insistence on balanced budgets or low deficits in Europe is costing the continent over $1 trillion a year in lost output (over $2,000 per person). Rather than spending money on improving infrastructure, education, health care and expanding the use of clean energy, the eurozone countries have been cutting back spending with the idea of getting their budgets closer to balance and lowering their debt-to-GDP ratios. These policies have also prevented millions of people across the continent from getting jobs.
The pain being experienced by workers across Europe is undoubtedly a factor in their hostility to immigrants and their turn to right-wing populist politicians. The deterioration of public services, like national health care systems due to needless budget cuts, has played an important role in this backlash as well. It is easy for right-wing politicians to blame immigrants for the deterioration in these services, even if the real problem is that said politicians' governments have reduced spending levels. After all, none of the mainstream politicians are making this point.
The austerity is altogether unnecessary because the evidence indicates that European governments could easily increase spending without hitting any constraints. The European governments are in the same situation as Bill Gates when he goes out to dinner: He can safely order anything on the menu without worrying about how he will pay the check. Similarly, in the current economy, European governments can increase spending to meet important needs and employ workers.
There are several measures that tell us European governments are not up against any real constraints. The most basic indication of a government running up against the limit of its ability to borrow is that it faces high interest rates on its long-term debt. The interest rate on government debt is currently extremely low across Europe.
The interest rate on 10-year treasury bonds issued by the French government is just 0.2 percent. The interest rate on Italian bonds is 1.1 percent. The interest rate on German bonds is -0.1 percent. That's right; you have to pay the German government money if you want to lend to them for 10 years. By comparison, in the United States in the late 1990s, when the country was running budget surpluses, the interest rate on 10-year treasury bonds was in the 5-6 percent range.
The other major factor to assess whether a country is running up against limits is its inflation rate. If an economy is overheating due to excessive government spending or any other cause, we would expect to see the inflation rate rising. We see the exact opposite across Europe, with the inflation rate remaining stubbornly close to zero in spite of the efforts of the European Central Bank to raise it towards its 2.0 percent target.
So if there are many great things that can be done with more government spending -- in addition to putting people to work, and low interest rates are an indication that the financial markets are begging governments to borrow money -- and low inflation means the economy doesn't face any constraints, what's the problem?...
The problem is that many people in leadership positions, especially those from Germany, cling to folk wisdom handed down to them from their parents or grandparents. They are told the story of the hyperinflation in Weimar Germany in 1920s. These leaders seem to hold the view that if we relax budget restrictions, even in a period of economic weakness like the present, we will soon be again confronting Weimar-type hyperinflation.
Of course, there is no logic to this position. There are many instances of governments boosting demand with deficit spending. Outbreaks of hyperinflation, especially in wealthy countries, are extremely rare. It would take a long period of reckless spending to push inflation to the point where it poses a serious problem for the European economy.
But even though there is no logic to this German view, it continues to be the basis for economic policy in the eurozone.
Nothing is more damaging to a economy then loserterianism.
