Monday, May 21, 2012

Is Austerity the Answer to the Economic Woes of the World?

We hear a lot lately about what is wrong with the Euro. The two following excerpts seem to capsulize the problem for me. I hope they clear up some of the problem for you, too.

Paul Krugman wrote in the N.Y. Times on 27 April, “All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.”

Writing in the Brooklings Papers On Economic Activity, Spring 2012, Jay Shambaugh says,“The euro area faces three interlocking crises that together challenge the viability of the currency union. There is a banking crisis – where banks are undercapitalized and have faced liquidity problems. There is a sovereign debt crisis – where a number of countries have faced rising bond yields and challenges funding themselves. Lastly, there is a growth crisis – with both a low overall level of growth in the euro area and an unequal distribution across countries. Crucially, these crises connect to one another. Bailouts of banks have contributed to the sovereign debt problems, but banks are also at risk due to their holdings of sovereign bonds that may face default. Weak growth contributes to the potential insolvency of the sovereigns, but also, the austerity inspired by the debt crisis is constraining growth. Finally, a weakened banking sector holds back growth while a weak economy undermines the banks. This paper details the three crises, their interconnections, and possible policy solutions. Unless policy responses take into account the interdependent nature of the problems, partial solutions will likely be incomplete or even counterproductive.” (I highly recommend this link; but if it will not open, copy it into your internet browser to read it. )

From my own viewpoint, I can see that growth of economies is the problem; but the difficulty is the solution. Conservatives believe that the answer to the problem is belt-tightening and quitting the cycle of tax, borrow, and spend. Liberals still cling to the idea that tax, borrow, and spend is still the answer. Those ideas have long since been proven wrong. It is absolutely impossible to spend ourselves out of debt. That is a STUPID idea.  

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