Jeff Madrick, unwittingly, makes the case for fiscal austerity

by on January 8, 2012 at 7:59 am in Political Science | Permalink

There is a far better solution. And it would not require the failure of the euro. The eurozone and perhaps the entire EU must act like a unified country, ready to recognize that it must take responsibility for the drastic social effects of rapid spending cuts… A financially unified Eurozone must then issue bonds to raise the money to pay back debts but also to provide a social net for the people of nations that are cutting back their spending on social programs to meet their remaining financial commitments…This can be accompanied by demands for reforms in nations like Greece where taxes must now be collected more efficiently and unusually excessive public spending stopped.

There is more here, and of course similar advice will work for Belgium too.

1 Yancey Ward January 8, 2012 at 10:46 am

That was hilarious!

2 Bill January 8, 2012 at 11:16 am

I think you are reading into this something you want to see but isn’t there, and, in fact, is quite the opposite, unless you favor expanding the social safety net and expanding and collecting taxes.

3 Jason January 8, 2012 at 11:39 am

I think Tyler believes taking “responsibility for the drastic social effects of rapid spending cuts” means people just sit around and feel guilty … which is free!

4 david January 8, 2012 at 11:17 am

“Take responsibility for X” doesn’t generally mean “refuse to do X because being responsible for it would be abhorrent”… Madrick, get thee to an editor.

5 maguro January 8, 2012 at 11:24 am

“A financially unified Eurozone must then issue bonds to raise the money to pay back debts…”

So they should get a cash advance from Visa to pay off their Master Card, eh? I’ve seen that done before and it didn’t work out so good.

6 Jason January 8, 2012 at 11:37 am

I assume you would also just sit on your 15% interest rate you got for your mortgage in 1983 instead of refinancing at 8% a few years later because it provides a great story of moral fortitude to tell your grandchildren. “In my day, I had to pay 15% interest on loans. And I liked it! And I had to walk to school in the snow … uphill … both ways!”

A tighter fiscal union would mean Germany could borrow at say 4% to pay off debts of Italy, Spain, Greece etc currently in the vicinity of 10%.

7 maguro January 8, 2012 at 12:15 pm

But will Germany still be able to borrow at 4% after they take on the debt burdens of Italy, Spain and Greece?

8 david January 8, 2012 at 12:22 pm

Would Italy, Spain, and Greece be able to borrow at 4% if they had Germany’s fiscal discipline?

9 Jason January 8, 2012 at 2:18 pm

No. Without fiscal union there would always be a risk premium on e.g. Spanish issued euro denominated debt. At least until they approach Germany in size.

10 Josh S January 8, 2012 at 5:46 pm

Size has nothing to do with it. Singapore’s government also borrows at low interest rates.

11 Ricardo January 9, 2012 at 1:41 am

The “original sin” argument says no. Italy, Spain and Greece have a history of unstable and dysfunctional politics that makes borrowing more difficult. The idea behind the Euro was that borrowing in what is in essence a German currency and signing a fiscal stability pact would solve the original sin problem. It hasn’t and has instead raised the cost of Euro membership dramatically for these countries which makes speculation against them all the more attractive.

Singapore borrows at low rates because, well, it doesn’t really borrow at all. The government sells bonds to the public but then also runs persistent budget surpluses so its net debt position never deteriorates.

12 JWatts January 9, 2012 at 12:22 pm

“Singapore borrows at low rates because, well, it doesn’t really borrow at all. The government sells bonds to the public but then also runs persistent budget surpluses so its net debt position never deteriorates”

This is an unsupportable statement. Running a budget surplus doesn’t preclude borrowing. It just allows the organization to smooth large, short term outlays over a long term period. Which is generally considered the reason that borrowing is an economic positive. To classify it as not really borrowing is silly,

13 The Original D January 8, 2012 at 2:03 pm

I think the point is that in a tighter fiscal union the meaning of “Germany” becomes less important. It’s kind of like arguing whether Connecticut can get better rates than Mississippi. The answer is “yes,” but Mississippi gets a lot more money from the Feds than Connecticut.

Connecticut doesn’t seem to complain much about that situation, which I guess is another way of saying they are responsible.

14 Topper Harley January 8, 2012 at 8:49 pm

Incorrect. The crappy report that everyone uses as a source for these numbers says that Mississippi gets more back per dollar sent to Washington.
In terms of actual dollars, Connecticut, with a 20% larger population, receives about 20% more total federal dollars than Mississippi. (Or, at least, that was the case in 2005
when the Tax Foundation last ran their report: )

15 The Original D January 9, 2012 at 12:49 pm

The report you link to shows that in 2005 Mississippi got $2.02 per dollar paid in to the Feds while Connecticut got $0.69. The last time Connecticut got at least dollar back for every dollar paid in was 1981.

16 The Original D January 9, 2012 at 12:52 pm

This, BTW, backs up my point. In a tighter monetary union, Germany will get less from the ECB than it puts in. Club Med nations will get more.

17 JWatts January 9, 2012 at 1:22 pm

That’s apples to oranges. A huge chunk of that money is Federal spending on the Ship yards to build military vessels. The Federal government is ordering a product and it’s going with one of the lowest cost providers, Mississippi. You might as well say China does even better than Mississippi since their revenue to tax ratio from the Federal government is close to infinite.

18 msgkings January 9, 2012 at 2:21 pm

China DOES do better than Mississippi

19 JWatts January 9, 2012 at 4:47 pm

“China DOES do better than Mississippi”

Yes, that was my point!

When I said China does better, I meant that China’s Federal Dollars collect to Federal Dollars in taxes paid is better than Mississippi’s. I was pointing out that the metric is a foolish one unless you account for exactly what the differences are. Mississippi does very well on the metric because they are poor, submit relatively few tax dollars, but build a lot of expensive Navy ships.

So it’s foolish to complain about the inequity in ratios between Mississippi’s and Connecticut ratio without correcting for Federal purchases.

20 The Original D January 9, 2012 at 10:28 pm

And all that money ends up in whose pockets? People who live in Mississippi. Ergo, more tax dollars go into Mississippi than come out. Dollars are fungible, so it most certainly is apples to apples.

If it makes you feel any better, throw out Mississippi and look at Maine. It got twice us much money from the Feds per dollar taxed than Connecticut.

And if you read my original comment you’ll note I’m NOT complaining. In fact, I’m pointing out that in the US we DON’T complain about it as a general rule. This is NOT the case in the EU at present. It will need to become the case if “tighter fiscal union”

21 Jason January 8, 2012 at 2:24 pm

No. Germany effectively sets EU monetary policy. They have whatever rate they want.

22 JWatts January 9, 2012 at 12:16 pm

“But will Germany still be able to borrow at 4% after they take on the debt burdens of Italy, Spain and Greece?”


23 CIP January 8, 2012 at 11:52 am


24 Bill January 8, 2012 at 4:35 pm

I would double your ????.

The comments clearly reflect that the commenters didn’t read the article which was the subject of Tyler’s judicious editing. What the guy says is that the austerity program in Europe is a failure, is leading to greater failure, and that the ECB should increase the money supply and that they should look at raising more taxes in the future, later.

25 FYI January 8, 2012 at 12:49 pm

Kind of related:

I wonder what golden boy, I mean, Krugman would have to say about this. A nice catch-22 for him.

26 maguro January 8, 2012 at 1:46 pm

Yes, let’s be just like Japan. We can start by modeling their immigration policy.

27 CH January 8, 2012 at 4:03 pm

would be a start.

28 Topper Harley January 8, 2012 at 9:00 pm

You’ve gotta love how the author links to shadowstats in order to show that the US hasn’t been growing according to published numbers.
Don’t get me wrong: It’s possible the “official” numbers aren’t correct, but there’s been more than a few people who have called out
shadowstats as being complete and utter bullshit. Basic stuff, like “Assuming the numbers are true, people are _paying_ 6% to borrow money from the US Treasury”.

29 JWatts January 9, 2012 at 1:29 pm

Is there a published critique of Shadowstats? I think the numbers are bunk, but there are always people linking to it as proof of some vast evil Federal conspiracy.

30 Mark January 8, 2012 at 2:10 pm

Medrick misunderstands the US: “The US is no shining example of enlightened policies, but the European Central Bank must guarantee the debt of its members just like the Federal Reserve guarantees the debt of the US Treasury.”

The Federal Reserve does *not* guarantee the debt of California or Illinois. If the states default there will be hell to pay, and the legislatures of those states had better not count on the Congressional representatives from Texas or Ohio to vote to bail them out.

31 mulp January 9, 2012 at 4:02 pm

But the national bank setup at Hamilton’s insistence did assume all the debts of the American States. In fact, that was the primary goal of the effort that led to the US Constitution. The reason for this step was Rhode Island refused to bail out the other dozen States, so the 12 States agreed to a new union and then coerced Rhode Island to accept the right of the majority of Congress imposing taxes on Rhode Islander’s using military force if necessary.

By the way, only the Federal government decides the rules of bankruptcy because the idea that Texas or Ohio could hold other States hostage like Rhode Island did back then was anticipated and dealt with in the powers of Congress. Rhode Island is no better off than Greece, so the Federal reserve will finance Rhode Island’s debt if the political process reaches the point of indirectly or directly addressing Rhode Island’s insolvency.

32 AlanH January 8, 2012 at 2:34 pm

How long is the re-proposing of many-times-rejected political non-solutions going to continue? Many of us, Americans, Canadians, Brits, and others have assets, investments and contracts at stake in Euro zone countries. If we continue to have such blather as this article stuffed into the papers month after month a realistic solution will never be agreed and we’ll experience a disastrous uncontrolled default and fragmentation. Perhaps this is a small matter to bureaucrats and tenured academics, but to the rest of us the realistic confrontation of the national differences and debts is a very serious matter. The analogy with Connecticut and Mississippi is a false one, obviously. Mississippi has neither the credit rating nor standard of living of Connecticut.

33 Josh S January 8, 2012 at 5:47 pm

Why do you still have assets in Eurozone debt?

34 derek January 8, 2012 at 8:27 pm

There is far more when it comes to investments, contracts and assets than trading debt instruments. Some of us are actually involved in producing things.

35 Anonymous January 9, 2012 at 9:06 am

Which state has a better credit rating?

36 Willitts January 8, 2012 at 3:26 pm

Lord Keynes wouldn’t have recommended increasing government expenditures and amassing debt during the boom that preceded the recession. The debt, debt service, credit ratings and interest rates are part of the equation of how to deal with the current crisis.

Spain ran a surplus not because the socialists were such savvy capitalists and frugal bureaucrats, but because Spain’s progressive tax structure resulted in highly volatile revenues. During the boom, revenues poured in, but in the bust, revenues retreated just as quickly. But spending stayed the same throughout, and debt quickly mounted. A similar situation struck California.

When the US Fed plunged the nation into another recession in order to combat inflation, it wasn’t thinking how “ruthless” the increase in unemployment would be any more than a doctor laments amputation of a gangrenous arm.

Much of the safety net policies are guarantees for people to sit on their asses and do nothing to contribute to GDP or revenues. We can’t expect 80 year old retirees to get back to work, but in the absence of those promises they might have worked longer or saved more. We can expect those who can work to start doing so, not at the wages they want for the jobs they want. The social safety nets have become a hammock for the lazy, not a safety measure for the tightrope walkers. Austerity doesn’t cost anything when it forces idle resources to work and forces resources to accept wages according to their actual worth. Why does anybody assume governments are efficient?

37 john haskell January 8, 2012 at 8:52 pm

Ah yes, the Fed plunged the US into recession in the fall of 2008 as part of a well executed and thought out program, sort of like a surgeon cutting off a gangrenous arm.

38 Willitts January 9, 2012 at 1:21 am

1981, goofball.

39 mulp January 9, 2012 at 3:44 pm

Sounds like some has been reading American history from 1785 to 1820. Why doesn’t the American solution work for the Eurozone given the Eurozone is faced with the same financial crisis of the American States circa 1985-86.

One of the architects of the Constitution immediately on ratification began an effort to borrow money to repay all the debts of the member States collectively and individually, then a program to effectively extract taxes from the citizens using threat of military force and economic sanctions over those who objected.

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