A Good Election for France and the EU

Socialist François Hollande defeated conservative Nicolas Sarkozy 52% to 48% to bring the Socialists back into the Presidency for the first time since François Mitterrand left office in 1995.   Angela Merkel’s partnership with Sarkozy – Merkozy, as it was called, had defined the plans to save the Euro and prevent the financial crisis from escalating.  Now that is in doubt.

Meanwhile in Greece elections look to show the two main parties, PASOK and New Democracy, could well fall short of having the capacity to build a coalition.  They are the only parties supportive of the bailout plan for Greece.   The rise of the far left and far right against the plan suggests that Greece could face a future without the Euro, especially if Hollande scuttles the “Merkozy” plans.   Financial markets in Europe are gripped with uncertainty as the Euro falls in value from about $1.33 to $1.29.   What does this mean?

The Greeks suspect that the severe cost of “austerity alone” simply means they’re paying to protect the big banks.

Americans and Brits tend to look at the EU with a jaundiced eye.   Americans especially don’t get it.   They don’t see how countries can link their destinies like that.   Others don’t like the EU and want it to fail so they hyperventilate over every crisis or bit of bad news.   That’s been going on for nearly 55 years and so far the EU has managed to grow and expand rather than fail.   Talk of the EU collapsing or even the Euro disappearing are way overblown.   The EU is not in danger, and the worst I can imagine for the Euro is that the number of participants could decrease by one or two.

What this means is that the Europeans will shift from an austerity focused German led recovery effort to one that is more nuanced and willing to challenge financial markets and big banks.   Austerity hasn’t been working out too well anyway.   Germany’s been the healthiest but Great Britain’s austerity has caused a second dip into recession and Greece is enduring a downward spiral.    The German economy is fundamentally healthier than others in Europe (and arguably our own), so they’ve avoided that kind of pain.

David Cameron ponders “what next” after his budget cutting helped push Great Britain into a double dip recession

Ultimately, a shift away from a Germanocentric policy is good for the EU.   German led austerity is not sustainable.   It will lead to resentment of the Germans, anger at the politicians, and the rise of the far right and far left.   Hollande will force Merkel into a partnership of the right and the left, and that’s always been good for Europe.

Consider:  Social Democrat Helmut Schmidt and conservative Valery Giscard D’estaing helped put aside the crises of the 70s and forge a stronger community.    Conservative Helmut Kohl and Socialist François Mitterrand were the forces behind the creation of the Euro and the expansion of the EU.    Europe does best when its Franco-German engine powers a vehicle with a wheel on the right side and one on the left.   Both wheels on one side make it unstable.

François Hollande is not a raging ideologue.   His first moves after the election was to contact Merkel, assure financial markets, and receive an invitation from President Obama to visit the US.    As President Obama learned, it’s easy to rail against the system when you’re on the outside; once you have power there are many subtleties of policy that have to be considered.

Expect Hollande to fortify the resolve of those who want to reject austerity as the primary policy for the EU.   It’s not that there isn’t a debt problem; Hollande notes openly that at 80% of debt to GDP, France has a debt problem.   Rather, solving that and getting out of this crisis by focusing on austerity and budget cuts alone is economic foolishness.

Merkel and the Germans are very influenced by economic theories that emphasize avoiding debt and accepting recession as “necessary medicine” to correct economic imbalances.   To them high debt precipitated this crisis and it will not end until debt is reduced and a proper balance is restored to the economy.

Celebrating Hollande’s victory

Hollande and others argue that a country in recession could be unable to get out of it if there isn’t something to stimulate economic growth.    One can imagine setting budget priorities to stimulate growth but cut unproductive spending.

This is not in direct opposition to Merkel.   Germany’s success has focused on stimulating job creation in other ways and restructuring the German economy.   She has never proposed austerity along as a solution; rather, budget cuts and debt reduction have to be part of a broad range of plans.   This means there are plenty of areas for Hollande and Merkel to find common ground.

Moreover, Hollande’s approach requires international cooperation.  No one state alone can handle this, the EU and even cooperation between the EU and the US is more important than ever.   The problem is to assure currency stability despite high debts and the messy process of economic rebalancing.   For Hollande would throw a grenade into the works of the EU would be self-defeating and he knows that.

Hollande was not Merkel’s choice, but they will be forced to work together

On top of that, Merkel faces an election in 2013, and her party has been hurt in recent state wide elections in Germany.   The political reality within Germany suggests that she needs to take into account the need to take seriously the negative implications of budget cutting alone.    Germany’s economy has been the envy of the industrialized world since the crisis started in 2008, but austerity within the EU would drive down demand for German exports and could cause a contagion recession for Germany.

Up until now the EU has had an unsustainable plan to handle the impact of the financial crisis.  It’s relied on German money and German leadership but hasn’t addressed the need for countries who have had inferior economic policies to rejuvenate growth as part of the solution.   The focus has been too much on debt reduction and too little on the costs of austerity.   With Cameron’s UK sinking into a double dip recession, his “debt reduction first” model is in severe doubt.

François Hollande is in a position to help nudge Merkel and the EU into a more broadly accepted path forward.  If the Greeks don’t want to participate, fine — let them have the drachma back.    At this point European banks are better prepared for a Greek default than they were a year ago, the system can handle it.    If that happens, the inevitable disaster that will hit Greece will pressure other troubled states to avoid the Greek way.   That, plus a set of policies more sensitive to the dangers of austerity will make it an easier sell.   Contrary to conventional wisdom, Hollande’s election will aid EU efforts to handle this crisis, help stymie the rise of the far left and far right, and may push Merkel in a direction that will help her win re-election.

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  1. #1 by Black Flag® on May 8, 2012 - 21:48

    Guido Hulsmann, professor of economics in France, to compare Hollande and Sarkozy. He wrote:

    Hollande himself is probably better as a person, especially being less powerhungry than his rival.

    But his programme is far worse, and even worse are the people around him.

    One of Sarkozy’s great virtues was his ability to collaborate with strong and competent people, many from outside of his party and even outside of politics.

    Hollande’s team is packed with socialist-party cronies.

    France has moved from extravagant wasteful spending into a socialist who will do even more.

    EU and the Euro are doomed, as I’ve predicted.

  2. #2 by pino on May 11, 2012 - 12:14

    Austerity hasn’t been working out too well anyway.

    I would love to see the data that supports your contention that Europe is embracing austerity.

    • #3 by Scott Erb on May 11, 2012 - 12:21

      The best example is the UK – Cameron made a point of cutting spending when he came to office, and now they are in double dip recession. Greece was forced to make steep cuts, and their economy has contracted dramatically. Economic theory is pretty clear on this too – cutting spending slows the economy.

      • #4 by James Bakter on May 11, 2012 - 13:17

        Nope. The UK has increased public spending year-on-year all through 2007 to now, that is to say Cameron’s government and Brown’s government have not made spending cuts. They maybe have decreased the rate at which spending was increasing… but calling that “austerity” is just outright nonsense.

  3. #5 by Scott Erb on May 11, 2012 - 13:27

    James, can you post a link to the data? They made a big point of cutting programs and spending, and that’s seen as helping push the UK back into recession. But to get a full grasp on what’s happening we’d need to see the data.

    • #6 by pino on May 11, 2012 - 15:17

      James, can you post a link to the data?

      It’s covered at Eurostat. To link is hard because the data is within a web query. Just go to “statistics” and look for “Economy and Finance” and then “Government Statistics”. The pull is “Government revenue, expenditure and main aggregates”. Even then you have to tinker with the pull, do this by clicking on the “Select Data” tab up top.

      Here’s the Expenditure for the UK:

      2002 – 442,000.0
      2003 – 479,946.00
      2004 – 516,520.00
      2005 – 553,045.00
      2006 – 586,956.00
      2007 – 616,626.00
      2008 – 685,969.00
      2009 – 717,320.00
      2010 – 735,938.00
      2011 – 738,885.00

      They may have been talking reductions in the same way WE talk about reductions. That is if you spend $100.00 this year and budget to spend $110 next year but then decide to only spend $105, THAT is a reduction.

      Or perhaps they are talking about reducing the rate of INCREASE. So that if you have an annual growth of 7% but then one year you see growth of 3%, THAT is a reduction.

      However you slice it though, with only a very few exceptions, the EU is NOT spending less year over year. UK is the perfect example.

      • #7 by Scott Erb on May 11, 2012 - 15:29

        But look at how small the change is between 2010 and 2011 – and that doesn’t include 2012. It’s clear that in a recession they stopped on a dime and haven’t been trying to stimulate. (Due to inflation and other factors some growth is natural every year). And guess what – they’re back in recession. It’s predictable. Spending cuts slow the economy, even more so than tax increases. That’s why cutting alone is not a solution.

      • #8 by Black Flag® on May 13, 2012 - 21:10

        “abstract laws”

        …well, that explains why economics so confuses you…

      • #9 by Scott Erb on May 13, 2012 - 21:55

        Economics doesn’t confuse me at all. It was one of my areas of focus for my MA and I teach a number of courses on political economy. You seem to think if someone doesn’t agree with your non-standard opinion they must be “confused” or ignorant. Believe it or not, smart, honest, educated people can disagree with you, and think your take on the world is wrong! They can do so even while thoroughly understanding the material and having analyzed as much if not more than you — that’s because many people do not share your assumptions and beliefs about the world. And that’s OK.

      • #10 by Black Flag® on May 13, 2012 - 22:04

        Scott,

        Economics doesn’t confuse me at all.

        What you present in incoherent, whether that confuses YOU is no measure – you ARE confused by the measure of the rest of us.

        You argue that economic turmoil is due to austerity and cuts – yet, cannot point to such austerity and cuts.

        You offer prescriptions of action – the very action that has created the turmoil – as a cure to the turmoil.

        I agree, many people do not share my analysis – and hold on to their own crackpot theory.

        Because they happen to have a theory does not make their theory “right” or “worthy of consideration”… especially if such a theory ignores basic reality.

      • #11 by Scott Erb on May 13, 2012 - 22:17

        You’re wrong, Black Flag. You’re not paying attention to my argument, your trick is to try to recast it as something it wasn’t. You also seem to be ignoring the fact that the British did make budget cuts. That’s a classic example – you then shift the definition to say that total spending must go down for there to have been cuts. That’s not true – if you’re in a recession spending goes up because more unemployed get benefits and government assistance is needed. Those amounts can stay the same but spending rise dramatically due to the impact of recession. At the same time, government programs can be cut.

        You also have to admit that the British have been most hawkish on trying to stop spending increases, and their economy has gone into double dip. Greece’s cuts (which have been real in overall terms) have lead to a severe spiraling downward, cutting revenue even more. Meanwhile, Germany and the Scandinavian countries in the north have done best and have the most sustainable economies even while having high taxes and social welfare spending. The problem in Greece is due to corruption and other deep political problems, you can’t pretend it’s just government spending!

        You also wrongly state that my prescription is to do the same as what came before. If you read my posts you KNOW that’s wrong, I certainly do not do that. I believe the most powerful way to test theories and understand their strengthes and weaknesses is through comparison. That’s why I compare health care systems to debunk a lot of the arguments against expanding health care in the US, or I compare economic systems to debunk claims that regulation, high taxes and a strong social welfare system cannot yield a sustainable, growing economy. Now, one can look at Scandinavian states, Germany and others and say they have things going for them that the US doesn’t (and certainly Greece doesn’t), but those are cultural and political more than economic. Only if empirical reality and comparisons give evidence that supports a theory do I take that theory seriously. If the theory is defied by empirical evidence, then I usually find it unpersausive or at the very least in need of serious rethinking.

  4. #12 by Alan Scott on May 11, 2012 - 14:08

    Scott,

    You seem totally committed to Keynesian economics . Government spending is good, no matter how much debt it runs up . What you fail to grasp is that public spending crowds out private spending . Since the private sectors in these countries do not throw off enough revenue, foreign investors must make up for the short fall . The further a country goes into debt, the less likely the foreign investors are going to get their money . I’m glad I don’t own Greek, Spanish, Italian, or Portuguese debt . Or maybe I do .

    Europe has structural problems brought on by policies you want to see implemented in the US . Entitlements are killing Europe and will kill the US. Think about it . The US has the burden of providing defense for the free world. Europe has had a free ride . Yet Europe is in worse shape because they are further down the road which you advocate.

    • #13 by Scott Erb on May 11, 2012 - 14:22

      Keynes said that governments should NOT run up debt during a boom and should in fact pay back any debt that was incurred stimulating the economy in a recession. If only Reagan and Bush had listened to Keynes and fought against rising debt in a booming economy! Keynes did not support the kind of long term debt that Reagan embraced. As far as defense, the US is wasting its money and the Europeans wisely realize they don’t need to spend so much. The US may think its protecting the Europeans, but they don’t need that protection. Moreover, the Scandinavian economies, Germany and many northern European states are in far better shape than the US at this point. The US is in steep decline thanks to the policies of the last thirty years.

      • #14 by Black Flag® on May 12, 2012 - 14:48

        Now, away from Reagan and the myths around him and back to Scott and his myths of austerity.

        You and Paul Krugman seem to what us to believe that not increasing spending is the same as cutting spending.

        He said
        …some people who should know better are conceding the point that maybe there haven’t been big spending cuts. Yes, there have.

        For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. Also, some spending represents banking bailouts, not exactly what people have in mind when they talk about big government.

        In other words, if it doesn’t increase big government -that is, isn’t merely a bunch of special interest spending like on the EPA, FCC, FICA or isn’t pure pork, shovel ready jobs, spending $120 million to repair 96 houses, military adventurism – but reflects economic “automatic stabilizers”well, that’s not a spending increase!.

        It’s the intention that counts when you evaluate the impact on aggregate demand.

        Silly me.

        In all my study, I didn’t realize that in the Keynesian model it isn’t government spending that affects aggregate demand, but only certain kinds of government spending.

        Keynes said government transfers were supposed to stimulate the economy.

        Almost all modern economics claimJ -including Krugman! taught that it doesn’t matter what government spends money on, it’s all stimulus.

        And when Krugman was touting a two trillion stimulus package, I don’t remember hearing the part about making sure it was pushed through with the right kind of spending and the right kinds of motives.

        But now, when that didn’t work – the piper doesn’t think its the flute that is broken, it was that he was not playing the right tune to the right crowd!

        Who knew that government spending only stimulates when it springs from a desire for bigger government?

        Just a few days ago, Krugman, like you, was arguing that Europe had tried slashing spending and that we now know that that didn’t work. Now he’s admitting that spending wasn’t slashed but that it really was, even though you can’t see it. You just have to know where to look.

        The fact, there was no austerity, there was no cuts.

        Sorry, Scott – I know you are required to apologize for all State actions -as they are sacrosanct in their behavior and above reproach – for you.

        The economic convulsions are not due to a cut backs or austerity but the very predictable (if you are not a Keynesian) economic consequences of irrational government behavior and its spending.

      • #15 by Scott Erb on May 12, 2012 - 20:17

        Ideology is a really crappy way to interpret reality – ideologies are vast oversimplifications of reality, rely on definitions and assumptions that melt away in the harsh light of the real world. Fact: the best functioning economies in the industrialized west are now found in Germany and the Scandinavian states – states with strong regulations, solid social welfare systems and good unions. They are out performing the rest. The only states to develop an industrial economy have done so with massive state intervention – China, Taiwan, South Korea, Brazil, etc. When markets are unregulated and states weak, you have a massive increase in wealth maldistribution, a loss of freedom, and oligarchies. Look to the real world for data, not to ideologies.

      • #16 by Black Flag® on May 12, 2012 - 20:41

        Fact: Your analysis is short-term, incomplete, and rests on fallacy.

        Where you have large government corporatism you have a massive increase in wealth maldistribution, a loss of freedom, and oligarchies, and you really must look to the real world for data, not to ideologies, Scott. Your defense of Statism blinds you.

    • #17 by pino on May 11, 2012 - 15:19

      The US has the burden of providing defense for the free world. Europe has had a free ride .

      Great point, Imagine what these countries would look like if THEY had to face the burden of protecting their own borders!

      • #18 by Scott Erb on May 11, 2012 - 19:29

        They do have the burden of protecting their own borders. When the US did protect them (the Cold War, at least through the 80s) it was done because it was in the US interest. But that was a generation ago, the Europeans don’t need the US to protect them any more. The US could dramatically cut military spending and suffer no loss in security.

  5. #19 by pino on May 11, 2012 - 19:09

    But look at how small the change is between 2010 and 2011 – and that doesn’t include 2012.

    Scott, it is IMPOSSIBLE to claim austerity when they have increased their spending every single year. They are simply not reducing their spend.

    And guess what – they’re back in recession. It’s predictable.

    When part of the definition of GDP includes a government spending component, then yes, reducing the government component could impact the GDP in a negative way.

    Spending cuts slow the economy, even more so than tax increases. That’s why cutting alone is not a solution.

    It is possible that the government spends too much money, either on good programs where it overspends or just simply on bad programs. Cutting that waste isn’t bad – ever.

    If you are claiming that government spending just adds money to the system that people then continually cycle through, I would imagine you would favor a helicopter dumping money across cities.

    • #20 by Scott Erb on May 11, 2012 - 19:31

      Well, a helicopter dropping money would have some stimulus effect, but I think targeted spending in ways that create jobs and are known to stimulate the economy is best. In times of high debt I think there has to be a pivot to cutting spending once you get growth. I agree that some spending can and should be cut, but much of that is pork that politicians of both parties protect.

  6. #21 by Scott Erb on May 11, 2012 - 19:27

    Sure you can claim austerity if the total amount is basically stagnant. Here’s the deal: budgets go up due to population increases and economic growth. Moreover, in a recession spending increases dramatically as there are more unemployed people and demands on government resources increases. In that environment, one can cut programs, slash spending on discretionary items, and yet still have the total amount increase because of the cost of the recession (unemployment benefits, etc.). For British spending to stay stagnant during a recession is a sign of austerity.

  7. #22 by Alan Scott on May 11, 2012 - 21:57

    Scott ,

    I realize that no matter what I say your fantasy economics will over rule the truth I am trying to teach you . ” If only Reagan and Bush had listened to Keynes and fought against rising debt in a booming economy! Keynes did not support the kind of long term debt that Reagan embraced. ”

    Were you asleep in the 1980s ? Let me attempt once again to set you straight . Reagan and Bush Sr did not deficit spend to spend their way out of hard times or goose the economy . Reagan spent to reverse the decline of the military that naturally happened post Vietnam and unnaturally happened under President Carter .

    Reagan especially tried to cut spending but he was thwarted by your guys in Congress who live only to use the US treasury to buy votes with entitlement and social programs . Reagan was forced to give in to your big spending Santa Clauses in order to get the military in shape . Tell me where I got that wrong, I double dog dare you .

    From a real practical level your Keynesian philosophy cannot work for one simple reason . It cannot be cut back in good times . The people getting the freebies scream and carry on when the lolly pops they have been getting are taken away. See Greece, see OWS . Then you are asking Congressional Democrats and Rino Republicans to cut back on handing out bigger lolly pops when the treasury is getting more money in good times . Tell me where I got that wrong, I double dog dare you .

    • #23 by Black Flag® on May 11, 2012 - 22:03

      Sorry, Alan, but here Scott is right.

      Reagan made no cuts – in fact, he expanding spending and the deficit to new levels in US history to that time.

      The problem of a big, bloated out of control government is not a problem of Dem vs Rep. They are both the problem – they are Team A and Team B of the same thing – the Warfare/Welfare State.

      There is no solution except economic collapse. They both will spend like drunks until the money runs out — and it will.

  8. #24 by Black Flag® on May 11, 2012 - 21:59

    Scott,

    But you cannot claim “cuts” because there have been none.

    You cannot claim “austerity” if they are still spending as much (actually more) then the did last year.

    You cannot claim “slashing” a budget if the budget is larger today in the past.

    Thus your economics and comments are baseless. It cannot be cuts or austerity that created the depression and unemployment, therefore there is another causation.

    But as a Keynesian, you have no theory to provide for this – thus, you can only argue consequences as if they were the original cause – you are arguing that the sneezing and a runny nose causes the cold virus to appear!

    Thus, claiming that “cuts” and “austerity” will not work based on examples of no cuts and no austerity is bewildering.

  9. #25 by Alan Scott on May 11, 2012 - 22:40

    Black Flag,

    I stand by my remark that Reagan voluntarily only increased military spending . All other increased spending was because of Congress. I tried to post a link to a liberal column complaining about Reagan’s cuts to social spending but it fails to post here .

    • #26 by Black Flag® on May 11, 2012 - 23:47

      Alan,

      Reagan had the veto.
      He did not use it.
      He promised he would.
      He lied.
      Instead, over 8 years in office he did NOT veto any budget.

      There is no defense you can muster otherwise when all the facts are against you.

      Period.

      • #27 by Scott Erb on May 12, 2012 - 00:00

        I was working in DC for a GOP Senator from 1983 to 1986. I was watching the budget debates first hand, and knew people working with the Reagan Administration. They didn’t care about budget deficits, and they struck many deals increasing social spending. Reagan’s policies are very different from those of the GOP today, he’d be “too liberal” for the party today. Moreover, the President is responsible for the bills he signs (and chooses not to veto). If he signs rather than vetoes something, using the term “voluntary” is a cop out. David Stockman famously resigned and published a book showing how poorly Reagan’s team was at fiscal management, warning about the high debts. Reagan led deficit spending during a boom — and between southern Democrats and his Senate majority, he had Congress on his side much of the time.

        Also, Reagan stopped the military build up after Gorbachev came to power in 1985 (defense spending leveled off in real terms, Gorbachev got credit in the USSR for ‘taming Reagan’). He spent less in his term than Carter’s projected military spending. So much of what the right wing thinks about Reagan is fantasy and simply wrong. I was there, on the ground during the height of the Reagan years, hanging around in Republican circles in fact. Just as I challenged you to actually read about the financial crisis, I challenge you to actually read about the Reagan years – the memoirs, Stockman’s book, etc. I think, Alan, you tend to read politically partisan sources and try to simply “take a side” in a competition. Reality is far too complex to be reflected well in those terms by either left or right.

  10. #28 by Alan Scott on May 12, 2012 - 02:26

    I don’t care what you two guys believe . I have read the liberals complaining about what Reagan did to their programs . And as far as a veto, easy to say BF . Reagan still had to make deals with the devils or he wouldn’t have gotten the money to fix the military . Clinton and W. both had to do deals with Congresses controlled by the enemy .

    Obama is the only President who refuses to compromise with the other party to get things done .

    Again Scott I read columns from lefties who hated that Reagan halted the growth in their leftwing Bolshevik vote buying ,

    You tend to under simplify all things . The view from Washington when you were there contradicts everything I know from outside . I followed events just as you did .

    BF,

    I have the facts . Life remains very simple to you, doesn’t it . You and Scott get to the same destination by opposite pathways .

    • #29 by Scott Erb on May 12, 2012 - 02:52

      It’s not what I believe, it’s what I know. Also, the economic boom of the 80s was built on debt — without the debt, there wouldn’t have been the same economic conditions. This isn’t even controversial. Also, the military not only wasn’t broken, but Reagan spent less than what Carter planned to spend!

      Obama wanted to compromise. The reason my Senator (who I voted for), Republican Olympia Snowe is retiring is because of the hyper-partisanship that is destroying our Republic. Obama wants to transcend that – which is one reason the left wing of the Democratic party has been hostile to Obama the last couple years (they call him Republican lite, and say he’s letting the GOP railroad him). Now Lugar, a Republican I’ve admired for years, has been defeated by someone who says DC is not partisan enough.

      Also, don’t get your information from reading columns by lefties or righties. That stuff is vapid and silly, from left or right. You have to look deeper, and analyze!

    • #30 by Black Flag® on May 12, 2012 - 05:27

      Alan,
      It’s not a matter of belief.
      It is a matter of FACT.

      Whatever you think some liberal says does not change facts.

      Reagan vetoed no budget. That is a fact.
      What do you want?
      Someone to say that the Prez had his hands tied?
      Then you are claiming he was a pussy.
      But you will stand up and say “no he wasn’t”.

      Well he either was or he wasn’t.
      If he wasn’t, he chose not to veto.

      Period.

  11. #31 by Black Flag® on May 12, 2012 - 14:49

    Now, away from Reagan and the myths around him and back to Scott and his myths of austerity.

    You and Paul Krugman seem to what us to believe that not increasing spending is the same as cutting spending.

    He said
    …some people who should know better are conceding the point that maybe there haven’t been big spending cuts. Yes, there have.

    For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. Also, some spending represents banking bailouts, not exactly what people have in mind when they talk about big government.

    In other words, if it doesn’t increase big government -that is, isn’t merely a bunch of special interest spending like on the EPA, FCC, FICA or isn’t pure pork, shovel ready jobs, spending $120 million to repair 96 houses, military adventurism – but reflects economic “automatic stabilizers”well, that’s not a spending increase!.

    It’s the intention that counts when you evaluate the impact on aggregate demand.

    Silly me.

    In all my study, I didn’t realize that in the Keynesian model it isn’t government spending that affects aggregate demand, but only certain kinds of government spending.

    Keynes said government transfers were supposed to stimulate the economy.

    Almost all modern economics claim -including Krugman! taught that it doesn’t matter what government spends money on, it’s all stimulus.

    And when Krugman was touting a two trillion stimulus package, I don’t remember hearing the part about making sure it was pushed through with the right kind of spending and the right kinds of motives.

    But now, when that didn’t work – the piper doesn’t think its the flute that is broken, it was that he was not playing the right tune to the right crowd!

    Who knew that government spending only stimulates when it springs from a desire for bigger government?

    Just a few days ago, Krugman, like you, was arguing that Europe had tried slashing spending and that we now know that that didn’t work. Now he’s admitting that spending wasn’t slashed but that it really was, even though you can’t see it. You just have to know where to look.

    The fact, there was no austerity, there was no cuts.

    Sorry, Scott – I know you are required to apologize for all State actions -as they are sacrosanct in their behavior and above reproach – for you.

    The economic convulsions are not due to a cut backs or austerity but the very predictable (if you are not a Keynesian) economic consequences of irrational government behavior and its spending.

  12. #32 by Black Flag® on May 12, 2012 - 20:42

    PS: Your ideological rant notwithstanding, what has been demonstrated is the refutation of your position – that of “austerity” and “cut backs”.

    There has been no such circumstance.

  13. #33 by Alan Scott on May 13, 2012 - 01:00

    Black Flag ,.

    ” Reagan vetoed no budget. That is a fact.
    What do you want?
    Someone to say that the Prez had his hands tied?
    Then you are claiming he was a pussy.
    But you will stand up and say “no he wasn’t”. ”

    You know President Reagan never actually launched a nuclear strike on the USSR either, yet he won the cold war . I guess he was a wuusss because he wasn’t nuts like Democrats said he was . You are just as muddled as Scott .

    Reagan got his priorities through a Congress controlled by Tip O’Neil . He could not get everything . If he would have vetoed budgets he may have been in Obama’s shoes where he won the budget battles and lost the the economy wars .

    You remember Tip O’Neil doncha ? Sworn enemy of balanced budgets, fiscal sanity, and all things Reagan . The Speaker is arguably the second most powerful man in the country . You can look up Tip O’Neil and learn what you are talking about .

    Scott,

    ” Also, the military not only wasn’t broken, but Reagan spent less than what Carter planned to spend! ”

    Not only are you wrong, you are silly wrong . What you say Carter was gonna do is entirely immaterial, irrelevant, and not worth discussing . Let’s talk about what Carter did, okay ? He tried to solve his budgetary troubles by starving the military . I had a relative in the military during Carter. Everyone that he knew detested Carter . Yes the military was broken . You are just as muddled as Black Flag .

    What is compromise ? That’s where Republicans vote for deficit spending on welfare programs and the only cuts are to the military . How about a compromise where your guys stop lying about the budget and maybe pass one ? Wait, all the Blue Dogs are gone . Only European Union Democrats are left and they never compromise about raising spending and raising taxes .

    • #34 by Scott Erb on May 13, 2012 - 03:04

      No, Carter didn’t starve the military. Back up your claim – you can’t just assert things and expect me to believe you — especially when I know it’s not true! Your claim about Tip O’Neil is just weird. Reagan’s own staff said budget deficits didn’t matter – again, check out the Stockman book. Trying to paint Reagan as some poor victim is a rather desperate ploy (was he really that weak?) Look, when you take the GOP majority in the Senate (nothing could get passed without the Senate) for most of the time, and his working majority in the House (add conservative southern Democrats to Republicans and Reagan had more votes than O’Neil) there is no way you can say Reagan was somehow a victim here and has no responsibility for the bills he signed. No way.

      The compromise that Boehner rejected (pssst – Democrats can’t pass a budget when they have a minority in the House and the GOP can filibuster in the Senate!) was 85% spending cuts (very little of that military) and only 15% tax increases. It was the latter that scuttled the deal, Obama was ready to talk entitlement reform. There is a reason why people are saying the GOP has become extremist — Reagan would be too liberal for this bunch! This story by noted and well respected Congressional scholars Thomas Mann and Norman Ornstein says it all: http://www.washingtonpost.com/opinions/lets-just-say-it-the-republicans-are-the-problem/2012/04/27/gIQAxCVUlT_story.html

    • #35 by Black Flag® on May 13, 2012 - 16:19

      Alan

      You know President Reagan never actually launched a nuclear strike on the USSR either, yet he won the cold war .

      No, he did not. He almost blundered into making it a Hot War.

      Afghanistan won the Cold War – they defeated the Soviets and the Russians never recovered.

      …how history will repeat itself again in the future…

      He tried to solve his budgetary troubles by starving the military .

      Nonsense.
      Carter assumed office in 1977 to 1981
      Here are the facts:

      1968 $449.3
      1969 438.1
      1970 406.3
      1971 370.6
      1972 343.8
      1973 313.3
      1974 299.7
      1975 293.3
      1976 283.8
      1977 286.2
      1978 286.5
      1979 $295.6
      1980 303.4
      1981 317.4

      1982 339.4

      Read more: U.S. Military Spending, 1946–2009 — Infoplease.com http://www.infoplease.com/ipa/A0904490.html#ixzz1ulcMSlea

      After the end of the Vietnam War, previous Presidents cut the military to its low before Carter took office

      That’s the problem, Alan – you are as bad as Scott – you base your economics, not on economic law, but on political ideology and try to twist facts to support your fallacy.

  14. #36 by Scott Erb on May 13, 2012 - 16:55

    The claim Reagan won the Cold War is silly on its face. Debates about economics and how much can be considered law like (only in the abstract is that even remotely possible – once you had culture, psychology, lack of information, uncertainty, time lags, etc., abstract laws don’t function in reality as they do in the simplified text books.

  15. #37 by Alan Scott on May 13, 2012 - 22:45

    Both of you gentlemen post so much thought provoking commentary that I would have to violate my oath to keep my posts short and understandable, if I were to answer each of your points . Well violate my oath more than I do .

    So leave me to answer what actually interests me .

    ” Trying to paint Reagan as some poor victim is a rather desperate ploy (was he really that weak?) ”
    That ain’t what I done . I said Reagan got the best he could get from Tip . More than probably any other human being could have . It strikes me as limitlessly funny how you fail to allow that Tip O’Neil was a significant check on Ronald Reagan, yet you have no problem scapegoating John Boehner for Barak Obama’s failures as a President .

    ” (pssst – Democrats can’t pass a budget when they have a minority in the House and the GOP can filibuster in the Senate!) ”

    Earth to Scott,,,,,,,,, the House has passed budgets and sent them to the Senate where ‘ your boy ‘ Harry allows them to die . Republicans haven’t had to filibuster them . Majority Leader Reid never lets them go to a vote because God forbid his people go on record for anything . Harry never even counter proposes a budget . No the lack of a budget for ,, what is it now 3 years or so, is 110 % on your people .

    Scott,

    ” No, Carter didn’t starve the military. Back up your claim – you can’t just assert things and expect me to believe you — especially when I know it’s not true! ”

    So you know it is not true ? In the words of the famous TV detective Harry Hoo, ” Amasing “.

    The military grunts were already under paid before Carter came in . During the first couple of years President Carter delayed pay increases to the military . In case you don’t remember Carter’s big failure was inflation . Again I got this from a relative who served during Carter . Prices went up and their pay hardly did . Their equipment was deteriorating almost as fast as their morale . Again, they hated Carter.

    • #38 by Black Flag® on May 13, 2012 - 23:55

      Alan,

      Again I got this from a relative who served during Carter . Prices went up and their pay hardly did . Their equipment was deteriorating almost as fast as their morale . Again, they hated Carter.

      There is no basis for your argument re: military spending or morale.

      Whether the military enjoys a Democrat President is one thing, but to justify that based on something Carter did or did not do is crazy. There is -simply- no such proof to justify your position OTHER than mere political bias and choice.

  16. #39 by Scott Erb on May 13, 2012 - 23:07

    Alan, you ignore that Reagan had a working majority in the House thanks to southern Democrats, and he had a majority in the Senate most of his Presidency. You’re ignoring that his own team said they didn’t care about deficits. You’re ignoring the fact that the economic growth was driven by debt, helping set up an economy that was unsustainable – which we’re finding out now. You put Tip O’Neill up as some kind of bogey man, but you don’t give any evidence. He was speaker of a house full of conservative Democrats. Reagan was the President and he had the Senate.

    You also seem to drop the claim about Carter except to say he didn’t increase pay raises soon enough. Inflation started with Ford’s (he had “WIN” pins – “Whip Inflation Now”), and that as part of the system after Ford left office. Carter was hurt by the 1979 oil shock. Oil prices went up from $10 a barrell to $40, meaning inflation skyrocketed and jobs were lost. It hit everywhere in the industrialized world to governments on the left and on the right.

    Paul Volcker in early 1980 started a dramatic cut in money supply and increase in interest rates. This plunged the US into a recession (which people who don’t understand economics simply blamed on the President, just like how people who don’t understand football blame everything on the quarterback). It worked, though. Volcker’s policies got inflation under control. Then when oil prices plummeted back down to $12 a barrel the economies of Europe, Japan and the US all started booming again. The US unfortunately started to deficit spend during a boom, and that was the beginning of what set up the crisis we face today.

  17. #40 by Black Flag® on May 13, 2012 - 23:47

    Scott,

    . You also seem to be ignoring the fact that the British did make budget cuts.

    Total Utter Hogwash.

    Budget UK (Central Gov. Only)
    2008 £427 billion
    2009 £462 billion
    2010 £496 billion
    2011 £512 billion
    2012 £527 billion

    That’s a classic example – you then shift the definition to say that total spending must go down for there to have been cuts.

    **DUH**

    For cuts to be made, spending must go down!

    AND YOU SAY I SHIFT DEFINITIONS!

    You are UTTERLY bizarre sir.

    You have totally no data that shows “cuts” – yet, you proclaim explains of circumstances and blame them on cuts made up in fantasy.

  18. #41 by Black Flag® on May 13, 2012 - 23:51

    Scott,

    That’s not true – if you’re in a recession spending goes up because more unemployed get benefits and government assistance is needed.

    SO
    THERE
    HAVE
    BEEN
    NO
    CUTS

    You admit it – yet, you claim opposite!

    Further, in your Keynesian dogma – you believe government should increase spending to cure the economic ills of government spending, right? That is why -to you- it is natural that government must spend more during a recession – all the while you are ignorant of the drain of capital such wasteful spending by government creates and has created.

    And, no sir, your Scandinavian country examples are not proof. Sweden has abandoned much of its Socialist programs as they found it completely unsustainable.

    • #42 by Scott Erb on May 13, 2012 - 23:57

      I agree Sweden had unsustainable economic practices. Yes, they smartly reformed them. But what they do prove is that you can have a robust social welfare system, high taxes and very effective economy. Germany, Finland, Norway, and other northern European countries prove that. They are handling this crisis better than most. A claim that high taxes, social welfare programs, and regulation prevent a strong economy is objectively false.

      You seem to ignore everything I said about Great Britain and give aggregate figures again! That’s what I mean – you ignore what others say and try to recast the debate in different terms. I’m not going to let you get away with that. They did make substantial budget cuts: http://www.csmonitor.com/World/Europe/2010/1020/Britain-s-budget-cuts-outline-radical-path-toward-smaller-government

      The cost of recession still increases overall spending. Let’s say you’ve just found out that your water bill, electricity and taxes were going to rise dramatically. To compensate you have to make cuts in spending on groceries, eating out, and other purchases. You’ve cut your budget. You might end up spending the same overall, but you made cuts. You apparently have some kind of bizarro-world definition of what a budget cut is!

      • #43 by Black Flag® on May 14, 2012 - 00:09

        Scott,

        I call bullshit.

        You point to a news article where the government ANNOUNCES something, and you act as if THEY HAVE DONE IT.

        They have not done anything – NOTHING HAS BEEN CUT – they pushed out the “cuts” into 5 years in the future – beyond the life of the current government so elected , even if they ever do such things.

        Your continued insistence on fantasy is very annoying.

        You have claimed that the CURRENT situation is due to CUTS – but CUTS have not been done.

        Your claim is IRRATIONAL, Scott. … there is NO basis in fact for it.

    • #44 by Scott Erb on May 14, 2012 - 00:05

      I have no dogma. Keynes had a lot of things right, so did Hayek. I’m not a narrow minded ideologue that thinks one “school” gets everything right and others get everything wrong. I openly mock that kind of thinking as representing mindless ideology, akin to religious faith.

      If you read my posts you know I’m skeptical of any stimulus once debt to GDP ratios reach 100%. If you read my posts you know I favor working towards budget cuts through prioritizing. I think how this is done will be tricky. I think Britain cut too much (and yes, they cut many programs, even if total spending went up – I’m using the standard economics definitions here). I’m also shown how too low of taxes plus deregulation helped lead to the creation bubbles which did much damage.

      Pull your head out of the cesspool of ideology and trying to categorize people as “Keynesian” or whatever. Such categorizations are pure BS. Deal with ideas, it’s dishonest to categorize someone and then argue against that category. It’s a dodge, a cop-out.

  19. #45 by Scott Erb on May 14, 2012 - 01:06

    BF, for you to say there aren’t budget cuts in Britain is to be either ignorant or dishonest. You are simply dead wrong. Some examples:

    http://www.bloomberg.com/news/2012-05-14/cameron-s-cuts-widening-north-south-u-k-wealth-rift-mortgages.html

    http://www.ukbudgetcuts.com/

    http://www.bbc.co.uk/news/uk-politics-11579979

    I could post numerous more, those were just the first ones that came up in a search.

    Just do any google search and you can find protests of cuts for a variety of spending, everything from youth groups to the police, with the cuts starting in 2010. You see editorials about Britain’s austerity program pro and con, how Cameron vows to keep with it, complaints about the impact of cuts, etc. Again, you’re ignoring the real world in order to try to push an ideology-based understanding of reality.

    • #46 by Black Flag® on May 14, 2012 - 04:54

      I call bullshit.

      Hear are the facts:
      2012
      Public Pensions £129 billion
      National Health Care + £124 billion
      State Education + £93 billion
      Defence + £47 billion
      Social Security + £112 billion
      State Protection + £33 billion
      Transport + £22 billion
      General Government + £19 billion
      Other Public Services + £54 billion
      Public Sector Interest + £49 billion
      Balance + £30 billion
      Total Spending = £713 billion

      2011
      Public Pensions £122 billion
      National Health Care + £121 billion
      State Education + £91 billion
      Defence + £46 billion
      Social Security + £110 billion
      State Protection + £34 billion
      Transport + £23 billion
      General Government + £19 billion
      Other Public Services + £53 billion
      Public Sector Interest + £44 billion
      Balance + £29 billion
      Total Spending = £691 billion

      2010
      Public Pensions £117 billion
      National Health Care + £118 billion
      State Education + £89 billion
      Defence + £43 billion
      Social Security + £107 billion
      State Protection + £34 billion
      Transport + £23 billion
      General Government + £19 billion
      Other Public Services + £60 billion
      Public Sector Interest + £31 billion
      Balance + £27 billion
      Total Spending = £669 billion

      2009
      Public Pensions £109 billion
      National Health Care + £110 billion
      State Education + £83 billion
      Defence + £42 billion
      Social Security + £95 billion
      State Protection + £34 billion
      Transport + £21 billion
      General Government + £19 billion
      Other Public Services + £61 billion
      Public Sector Interest + £31 billion
      Balance + £23 billion
      Total Spending = £629 billion

      2008
      Public Pensions £101 billion
      National Health Care + £102 billion
      State Education + £78 billion
      Defence + £38 billion
      Social Security + £87 billion
      State Protection + £31 billion
      Transport + £21 billion
      General Government + £17 billion
      Other Public Services + £50 billion
      Public Sector Interest + £31 billion
      Balance + £26 billion
      Total Spending = £582 billion

      http://www.ukpublicspending.co.uk/breakdown_2008UKbt_11bc5n

      Please find your “cuts”, sir.

      • #47 by Black Flag® on May 14, 2012 - 04:58

        Scott, oh and “PS” your articles show no cuts – they say “PLANNED cuts”.

        Please show me the MONEY, not your fantasy of “oh, we are planning it” junk statements.

        As I posted months before, to which you ranted and frothed – that Greece will not cut, did not cut regardless of what they said or planned.

        You, even then, acted as if they had.

        Now, you know they did not – and will not – but continue to spew the same lie.

        I wonder if you are still being played the fool re: Greece, even today?

        More to it, I wonder if Germany will continue play the fool (it appears not much longer).

  20. #48 by Alan Scott on May 14, 2012 - 01:33

    Black Flag,

    The military pay raises during Carter did not keep up with inflation . Carter delayed even those pitiful morsels . Prove me wrong !!

    Scott,

    I do not know where to start . ” You’re ignoring the fact that the economic growth was driven by debt, helping set up an economy that was unsustainable – which we’re finding out now. ”

    Let’s see, it was sustainable for , , , , , I don’t know, , , , a quarter of a century. Why don’t you say that George Washington set up an unsustainable country ?

    You really jump through idealogical hoops to make your points . The word for today , , , , is , , , , rationalization .

    Oh yea . How sustainable is a $ 5 trillion debt run up in 3 and a half years ?

  21. #49 by Scott Erb on May 14, 2012 - 02:01

    No, Alan it was NOT sustainable for 25 years. I’ve posted graphs over the months that show starting in 1980 everything started to go on an unsustainable route. Government debt went from 30% of GDP to 60% from 1982 to 1990 – most of that debt growing during a boom. Our current account went into deficit and that deficit kept growing (except briefly during the 1991 recession) to unsustainable 7% of GPD by 2006. Total debt was around 150% of GDP for most of our recent history, since 1980 it’s had a steady climb to about 400% of GDP (that includes private and public debt). I’ve noted the deteriorating distribution of income which started then.

    What we did was have a debt-based economy, trying to get “Something for nothing” for thirty years. It was an illusion. We consumed more and produced less. It was unsustainable.

    Your argument is like this one: Bob gets a credit card and charges it to the max in the next two years. For the next 15 he kites – gets new credit cards, charges them to the max, manages to pay minimums at first but then needs new cash advances to pay minimums. He might keep this up for 10 or fifteen years. It finally gets him in the end. Your argument is that his personal finance was sustainable for those 15 years but not at the end – that he was OK up until the time it came crashing down. That’s a false argument.

    I am not happy with increasing debt now, BUT – increasing debt in a recession has some logic, you need to avoid the recession spiraling downward and you need growth. Reagan and Bush the Younger increased debt during BOOMs! That was economic insanity and I suspect they are not going to be treated well in the history books.

  22. #50 by Black Flag® on May 14, 2012 - 04:34

    Scott,

    I have no dogma. Keynes had a lot of things right, so did Hayek.

    The parts Keynes “got right” were parts already described by economists back in 1880. It is not the parts that were already right – it is the parts that are terribly wrong.

    The school that get’s things right is the school that undertakes science – that is, applies theory to explain cause … that actually explains cause.

    Holding on to theories that consistently fail to explain cause – …. and worse, makes things go disastrously astray is bluntly ignorant and a sign of a dogmatist.

    I favor working towards budget cuts through prioritizing. I think how this is done will be tricky

    Budgets WILL be cut via priority – the real question is “who’s priority?”

    You believe YOURS to be superior in choice; I do not believe that you – or anyone else – is capable of making that choice. 100% of the choice is 100% political, not economic and not rational.

    IT will be made upon those who have fewer political voice or power and will avoid those who have a greater political voice or power, and nothing else.

    You merely maybe frustrated that your advocating is for the wrong side in that choice.

    I think Britain cut too much (and yes, they cut many programs, even if total spending went up – I’m using the standard economics definitions here).

    You are not using “Standard” economic definitions of anything! The word “cut” holds the same meaning out as in “economics”.

    You have shown no cuts – none – though you act as if they exist. Your evidence is a comment saying “we’ll cut soon, real soon, like next year or in year 5″… you have shown nothing more.

    Every instance says “we PLAN to cut”, but nothing has been cut.

    I’m also shown how too low of taxes plus deregulation helped lead to the creation bubbles which did much damage.

    You have shown no such thing.

    Economic bubbles are created by government interference in the economy – artificially cheap credit extended to itself and to its monopolies.

    Your solution is more government interference in the economy and tighter monopolies.

    Pull your head out of the cesspool of ideology and trying to categorize people as “Keynesian” or whatever. Such categorizations are pure BS. Deal with ideas, it’s dishonest to categorize someone and then argue against that category. It’s a dodge, a cop-out.

    I categorize YOU by the crackpot theories you espouse because I know YOU did not make them up – you are merely parroting what someone else told you to say.

    That is why you make up stories about cause and effect – claiming “austerity” and “cuts” is creating the economic turmoil – yet, confronted with the demand to present fact, you cannot show such things.

    Yet, you are hell-bent in remaining married to your ideology – which is rooted in Keynesian and the Statist mode. It is all you know.

  23. #51 by Black Flag® on May 14, 2012 - 04:45

    Alan,

    http://www.military.com/benefits/content/military-pay/charts/historical-military-pay-rates.html

    Using O-10, 2 yrs of service as a base….

    1976 – 3047/mon
    1978 – 3414/mon
    1980 – 4081/mon
    1981 – 4098/mon

    In 5 years, a 35% increase in monthly salary (4098-3047=1051/3047=35% increase)

    So, please Alan – for God’s sake – accept the fact that Carter’s policies regarding the military are no where near your fantasy. The case that many in the military did not like Carter because of what they felt was a tepid response vs. Iran.

    But no one could have or would have done differently. But the military was embarrassed by the take-over and the failed rescue mission.

    Face the fact.

    Both circumstances was due to military incompetence, not President Carter, and those in the military wanted a scapegoat – so time to wake up and get your facts straight and straighten out your own understanding.

  24. #52 by Black Flag® on May 14, 2012 - 05:06

    Scott,

    I am not happy with increasing debt now, BUT – increasing debt in a recession has some logic, you need to avoid the recession spiraling downward and you need growth.

    You are incoherent.

    The problem is the ravenous appetite of government and its debts.

    You see the problem.

    Your solution: continue the feeding and increase the debt.

    To this, you claim “this is logical”.

    You maybe have been right (for the wrong reason) in claiming more wild spending of government, and pushing interest rates lower and lower would stave off a recession…. had you made such a claim in 2001….

    But no different now, all you are doing is pushing the recession into the future, and making it worse, deeper, longer and more painful.

    Now your prescription that was enacted in 2001 comes due today. Your solution: same as 2001.

    One day, the prescription will kill the economy. It probably is today – but maybe, just maybe, it will delay the death until 2014/2016.

    But collapse will come – and you will bewildered by it, and no doubt blame the free market.

  25. #53 by sheokhanda on May 18, 2012 - 02:00

    If greece’s economy collapses completely (which seems to the path it is heading) will it be thrown out of EU ?

    Plus what do you feel is the future of EU ? will it sustain and survive….

    Hollande has said that he would go after the financial sector , the banks in particular (alteast that is what I have read most online about him) and certainly no austerity measures as you have already mentioned.

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