You really want to understand what is going on in Europe and the United States? It is fairly simple, but there is a whole lot of misdirection depending on your ideological point of view. But before I point that out, here is what has happened:
- In America we really have had a sick economy for some time. Wealth has been created by bubble economies, the latest and greatest being the housing bubble. Americans were using their new found real estate wealth to extract equity to support demand (their spending albeit for mostly foreign goods). Note that the indication of our sickness were that the anemic recoveries called jobless recoveries after each bubble burst. When the housing bubble burst, not only did the spending stop, but the debt to equity ratio for private debt got much worse. Meantime our government spending was creating large deficits due primarily to tax cuts we could not afford and did not need. With the collapse of the housing bubble and the resulting draw down of our economy, revenue decreased from joblessness and payouts increased for our safety net. Now with state governments shedding jobs and cutting spending, we are further constricting. Add to that the idea that we need to live within our means is translating into a program of further cuts and austerity, and the outlook is bleak.
- In Europe personal debt was not really the issue. We have a large area living on a single currency, and some of the member states are much poorer than others. So when the housing collapse occurred (Yes Virginia, we sold those worthless investments around the world) some governments who were living beyond their means got caught in a credit crunch. Greece was truly a problem, but the rest of the problem areas, Italy, Portugal, and Spain, were borrowing responsibly, but then their costs of borrowing went through the roof and this made a minor problem gigantic. The issue here is the lenders (usually other banks in the EU) think that these countries, now with especially depressed economies, cannot repay their loans. Unlike the US where if things get bad enough, we can just print money dollars, they can’t. So the banks want more interest for the risk, and that adds to the debt of these countries making the risk even more risky. Now if these countries go down (default on their debts), the big banks go down, and the domino effect could reach all the way back here. The European answer has been austerity, live within your means, and things will get better, except they haven’t. As austerity decreases jobs, spending decreases, and the economy falters even more.
Get a sense of a theme here? Austerity, while it seems logical that we should live within our means, is killing us. It is making a bad thing worse. Now historically, after the Great Depression and WWII, what got both Europe, Japan, and us out of our problem was massive growth. Our deficit after WWII was 30% of GDP, nowhere near where it is today (10%) more or less). That growth came from massive spending whether it was investment after the war in our own country, and the Marshall Plan by our government. What happened was that we grew GDP to the point where the debt was a small percentage of it. That is where we need to go again. Here is a quick summary by Robert Kuttner of what is being proposed in our own country (and it applies equally well to Europe) and its problems:
“A real recovery program would be one part massive public investment — partly financed by higher taxes on the wealthy, partly by deficits — and one part a complete reconstruction of the financial system so that it returns to its role of servant of the real economy rather than master. Neither party is proposing this, and proponents of a new political center are mainly promoting austerity.
The Republicans would drastically cut taxes, shrink public spending, and repeal regulations. All this, presumably, would liberate businesses to create more jobs. However, taxes were cut several times under President Bush, but that didn’t prevent the recession. Government revenues are already at their lowest share of the economy since the 1950s.
Centrist groups like Third Way and No Labels decry the extreme partisanship and call for a new consensus to deal with the crisis. These and similar groups begin with a plea for budget discipline. But austerity would not solve the economic crisis either. With unemployment high, consumer demand depressed, and businesses understandably hesitant to invest, more belt-tightening will only worsen conditions.”
Sadly President Obama and his forces seem to be pandering to the centrists groups for re-election. Leadership and a real vision for our future is just not part of our political scene right now. Re-election is more important than fixing the country. Or (I am watching all the Harry Potter Movies) as the central moral theme in J. K. Rowling’s Harry Potter novels is about doing what is easy or what is right, it would appear that easy is the trend of our times.
Now I have made this argument before, but I want to prepare you for what you are about to hear from the folks who brought us this disaster, the Republicans. First and foremost they hate government so they must define government as the problem, hence the Freddie and Fannie argument that the government caused the bubble and things would be just fine if government had stayed out of the markets. This ignores the fact that giant fortunes were being made by creating debt and selling it worldwide, and these forces were aligned to create more debt so more fortunes could be made selling it. But for those of you more academically inclined, read Mike Konczal and his sources. Of course the American Enterprise Institute and others have ginned up papers supporting this Freddie/Fannie nonsense, but the data just doesn’t support it. Sadly, most conservatives never go further than the sound bite if it is what they want to believe.
The other argument is that there really isn’t a problem with wealth distribution because what is driving it is that the better educated are getting ahead and that is just how the world economy is working. Sadly that too is a big lie and has been adequately and thoroughly debunked (Paul Krugman), but once again, conservatives hear what they want to hear to maintain the status quo and justify returning to business as usual. Ask yourself, is this working out for you. The 99% don’t think so.
The sad truth is that we are on the totally wrong path confusing a very poor analogy of living within our means to national and world economies. We have major structural problems with our economy that have been built up for almost 50 years and has left us where we are today. There is no going back to bubble economies unless you like our present condition, and trust me, the top 1% and their conservative puppets do. The really really sad thing is that real fixes are not even being discussed. So stock the food closets. Until we learn that history has something to teach us, we are going to suffer more pain without any gain.