The wisdom of Gideon Rachman

by on May 1, 2012 at 2:16 am in Economics, Political Science | Permalink

Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before?

…If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment.

Worse, in some ways, EU funding for infrastructure has created problems. In Greece, milking the EU for subsidies became an industry in itself: and political connections were a surer route to wealth than entrepreneurial flair.

…Even in France, the centre of the revolt against austerity, it is hard to argue that the problem is that the state is not doing enough. This is a country where the state already consumes 56 per cent of gross domestic product, which has not balanced a budget since the mid-1970s, and which has some of the highest taxes in the world.

Mr Hollande, who is not an idiot, knows all this. That is why, behind all the feel-good rhetoric about ending austerity, the small print is less exciting. In fact, all the Socialist candidate is promising to do is to take a year longer than President Nicolas Sarkozy to balance France’s budget. In Europe, even the left cannot pretend that deficit-spending can continue for ever. So they are reduced to arguing that governments are cutting, “too far and too fast”, in the words of Ed Balls, Britain’s shadow chancellor. This is small-scale quibbling – masquerading as a major doctrinal dispute.

Do read the whole thing.

Michael Heller May 1, 2012 at 7:38 am

I liked this article a lot. Nevertheless the public (and indeed academics and politicians themselves) could be forgiven for believing that there is truly “a major doctrinal dispute” underway. Isn’t there? If there is not then Ed Balls et als. should *tell the truth*.

chuck martel May 1, 2012 at 10:32 am

Of course there’s a “major doctrinal dispute” underway. It’s the continuing ideological confrontation between state-imposed redistributionist socialism and the free market.

Michael Heller May 1, 2012 at 10:53 am

As I suspected. Three months ago Germany’s #1 or #2 economist Hans-Werner Sinn put it this way:

“… the socialist way. Investment guarantees will lead, via issuance of Eurobonds, to socialization of the risks inherent in public debt… The socialist way follows necessarily from the free access to the printing press that has so far characterized the eurozone.”

Fighting the clever socialist intellectuals in the media and academe has always been a struggle. In a crisis the bourgeoisie always becomes meek and apologetic. Schumpeter and Weber complained about exactly that.

gabe May 1, 2012 at 2:27 pm

Odious debts be damned, the people must be taxed more to pay the banksters.

This is the unspoked agreed upon theology of the elite left and right politicians and the elite establishment commentators at the FT, NYT etc.

Squabbling over who would have killed Osama better is theatre.

Luis Enrique May 1, 2012 at 8:01 am

I’m less impressed. “If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming” – there’s a big difference about boosting government investment expenditure during a recession and during “normal” economic times. I seem to recall a prominent supporter of such policies writing a book about it (The Return of Depression Economics”. If Greece and Spain were splurging on roads and trains now, maybe they would be faring better.

Anon. May 1, 2012 at 9:23 am

Too bad some of recessionary spending becomes permanent (for rather obvious public choice reasons)…there is no plausible scenario in which Greek politicians would choose to spend in a recession and then stop spending when it’s over.

See http://marginalrevolution.com/marginalrevolution/2012/03/temporary-vs-permanent-increases-in-government-spending.html

Marian Kechlibar May 3, 2012 at 5:15 am

Trusting governments to stop with deficit spending when the economy improves is like trusting an alcoholic to stop with drinking when his problems get better.

otto May 1, 2012 at 9:15 am

What the Eurozone needs is more like a 4% inflation target.
Something like this:
http://www.slate.com/blogs/moneybox/2012/04/04/relatively_easy_solutions_for_europe.html

JWatts May 1, 2012 at 3:08 pm

The problem with that statement is the assumption that the Eurozone needs the same inflation target in every area. And therein lies the rub.

Tom May 1, 2012 at 9:33 am

I wish Rachman had simply addressed his colleague Martin Wolf’s contention that in a recession driven by private debt (i.e. Spain), the public sector must be willing to run substantial debts to allow the private sector to deleverage without collapsing the entire economy. This whole issue is about timing.

schtevie May 1, 2012 at 9:41 am

This is just sad. Truly sad. Highly, pro-cyclical, EU infrastructure investments: a policy whose time is now! Economic depression: the preferred environment for enacting market-liberalizing reforms, those making economic life more precarious! Gideocy.

The only “wisdom” is doubling-down on analytical errors, consciously or otherwise. To admit fundamental error in one’s world view is generally bad for one’s career.

Andreas Moser May 1, 2012 at 10:49 am

I am not at all excited about Mr Hollande, but since Mr Sarkozy’s xenophobic rants – http://andreasmoser.wordpress.com/2012/03/12/the-logic-of-nicolas-sarkozy/ – he has become unelectable for me.

TGGP May 1, 2012 at 3:58 pm

Are you allowed to vote in France? I thought you were German.

Moggio May 1, 2012 at 11:17 am
chuck martel May 1, 2012 at 12:32 pm

So what is he saying? He can’t be saying that there should be a cap on bond interest rates, no one would buy them. He must be saying “Print more money.” And “Don’t let any banks fail”.

CBBB May 1, 2012 at 1:10 pm

Is it wisdom? I predict bad things for Europe if this unemployment is allowed to continue – things that don’t appear in the standard economic models where unemployed labour simply sits around waiting for adjustment.

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