On the Contrary

There are two outliers to our economic choices that I laid yesterday (It Really is All About the Economy), and they are Europe and China.  If their economies crash, so goes our economy.  Europe is a study in failed Republican austerity with the added attraction of the denials of its failure in the face of unrelenting data showing it is a failed policy approach.  The bottom line here is that there is no confidence fairy and contractive policies don’t create demand through confidence, but contract the economy just as they have always done.

There are two major issues here.  First is the obvious which is that with these failed policies, the failure of results to overcome ideology to change strategies should tell you all you want to know about how the Republicans and their own free market ideology will never allow them to accept what is needed in our economy, government spending.  The smarter they are, the more arcane and convoluted are their arguments.  But for Europe, things get even more scary.  Not only are they contracting their economy into a double dip recession, but they are facilitating the rise of radical extremism in their politics, the second major issue.  Both Paul Krugman (NYT) and Martin Wolf from the Financial Times have laid out the real changes that need to happen and they are not.  Caillie Millner of the SF Chronicle (Trouble in Europe May Only Get Worse) wrote what I think is a very insightful measure of the how to judge if things are getting worse:

1. Watch the rise of Extremist Groups.  As she points out, this has not ended well in the past.
2. Whether the ECB will take the role of a European Central Bank or continue as a German one.
3. How the countries who did not deserve this austerity react as their GDP’s and employment crash.
4. As the rest of Europe loses its buying power, Germany’s export dependent economy will get into trouble and we will see how Germans react.

My view is simple.  They will crash the Euro before they fix it and it will have serious impacts on our economy.  Austerity simply does not work to expand an economy and we in this country should learn how hanging on to a failed ideology in the face of overwhelming data saying it doesn’t work is also disastrous.  See Republican economic theory.

The other outlier is China and Paul Krugman in a blog he read by John Hempton, he pointed out some potential issues which could spell real trouble and a constricting economy for China.  Basically:

Hempton “argues that China has turned financial repression — controlled interest rates on deposits, which ensure a negative real rate of return — into a giant engine of kleptocracy. The banks extract rent from depositors, transfer those rents on to state-owned enterprises in the form of cheap loans, and then the Party elite essentially embezzles the money. Underlying the whole system is a high savings rate that Hempton attributes to the one-child policy.

Actually, if he’s right about the demographic underpinnings, there’s a time bomb lurking in the system quite aside from his concerns about inflation running too hot or too cold: eventually, and as I understand it fairly soon, those older Chinese who have been frantically saving because they don’t expect enough grandchildren to support them will become net dissavers, pulling money out of the banks to live on. And then, if his basic story is right, the whole system implodes.”

Now none of this has to happen.  If we accept two changes in policy, these problems are solvable.  The first is that Keynes was right and we need to stop constrictive policies like austerity, learn to live with the deficit for a while until we can pay it down or grow out of it, and the second is to understand that inequality in incomes (both in China and the U.S.) breeds a weak economic system that is more susceptible to collapse than wide spread economic equality.  The Keynes solution provides increased demand when the private sector can’t provide it, and the economic equality provides more money in the hands of consumers to also expand demand.  To effect this, we need to throw the yoke of conservative ideology off and implement progressive policies before we crash the whole world economy because we could not react to the reality around us and we wanted life to be a morality play.

Meanwhile I am going to Monterey and drink good wine for a few days. If the economy crashes, maybe I won’t have pay off my credit cards.