The cost of austerity

[Puppycow]

Just check this story about Estonia out. You can listen or read:

http://m.npr.org/story/94427042?url=/series/94427042/planet-money

Summary of the main points:

Estonia just joined the euro.

To do it, they carefully followed all the EU money rules to the letter.

By doing this, their economy contracted by 13% and their unemployment rate rose to 18%.

[bluesjnr]

I got to page 8 (each page has an average of 300 or so characters) and gave up, then checked again to find that I had actually reached the end of the article. Up to that point I read nothing other than lamentations on losing the "old" currency, promises of generating heating by melting the coinage :confused: and wistful stories of what people bought with their 1st Kroon. Oh, I should mention that one of the participants in this discussion was a judge from Estonian Idol :boggled:

You can, I subsequently learned, view the whole lot in one page here (http://m.npr.org/news/front/94427042?singlePage=true) but if you are expecting it to shed any light on Puppycows summary of the article you will be sorely disappointed.

Puppycow, was this the link you meant to post?

[psionl0]

To do it, they carefully followed all the EU money rules to the letter.

By doing this, their economy contracted by 13% and their unemployment rate rose to 18%.Funny but the words "economy", "unemployment", "rule" and even "%" don't appear even once in that link.

[Puppycow]

I got to page 8 (each page has an average of 300 or so characters) and gave up, then checked again to find that I had actually reached the end of the article. Up to that point I read nothing other than lamentations on losing the "old" currency, promises of generating heating by melting the coinage :confused: and wistful stories of what people bought with their 1st Kroon. Oh, I should mention that one of the participants in this discussion was a judge from Estonian Idol :boggled:

You can, I subsequently learned, view the whole lot in one page here (http://m.npr.org/news/front/94427042?singlePage=true) but if you are expecting it to shed any light on Puppycows summary of the article you will be sorely disappointed.

Puppycow, was this the link you meant to post?

Sorry. Here's a better link (http://www.npr.org/blogs/money/2011/01/19/133033971/the-tuesday-podcast-the-euros-model-student).
I posted that from my android phone and I thought it was the story that I was listening to on my ipod, but apparently not.

[CatOfGrey]

Haven't listened to the podcast, or read any article. But here's a thought.

Euro nations are generally regarded as "in trouble". Greece got bailed out, and might need more help. Ireland is next. Portugal, Spain, and Italy, aren't out of trouble - any Spain and Italy are big nations to bail out.

And new nations are joining the troubled list - last week, I heard that Belgium is a possible future bailout candidate.

Perhaps some of this is bad timing: Estonia has "bought Euros when the Euro is collapsing".

[Jaggy Bunnet]

Just check this story about Estonia out. You can listen or read:

http://m.npr.org/story/94427042?url=/series/94427042/planet-money

Summary of the main points:

Estonia just joined the euro.

To do it, they carefully followed all the EU money rules to the letter.

By doing this, their economy contracted by 13% and their unemployment rate rose to 18%.

Given that the Estonian Kroon has had a fixed rate with the DM, then the Euro since it was reintroduced in 1992 and therefore have been members in all but name for years how exactly is this connected to joining the Euro?

And was that effective membership of the Euro also responsible for the annual growth above 7% per annum each year from 2000 to 2007?

Or is it all a bit more complex than that?

[Puppycow]

The point is not about joining the euro per se, but about the procyclical (http://en.wikipedia.org/wiki/Procyclical#Meaning_in_policy_making) effect of austerity measures in a recession.

[jayh]

The EU is being dragged down by existing members with huge and growing debt relative to their GDP requiring bailout. The last thing it needs is for another topheavy government to join and drag it down further.

[Puppycow]

The Austerity Delusion (http://www.nytimes.com/2011/03/25/opinion/25krugman.html?hp)

Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.

What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.

It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.

[Tippit]

The Austerity Delusion (http://www.nytimes.com/2011/03/25/opinion/25krugman.html?hp)

What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.



Slashing spending is indeed a mistake, as the dislocationary effects will be overwhelmingly negative, like a heroin addict going cold turkey. So would continuing to increase spending on government jobs that produce nothing of what anyone really wants. Of course, austerity advocates were right that spending cuts would produce confidence - for sovereign bondholders among other government parasites.



It was not always thus. Two years ago, faced with soaring unemployment and large budget deficits — both the consequences of a severe financial crisis — most advanced-country leaders seemingly understood that the problems had to be tackled in sequence, with an immediate focus on creating jobs combined with a long-run strategy of deficit reduction.



Only statists like Krugman believe that having central planners focus on "creating jobs", would be ideal, and only idealists believe that politicians will ever care about long-run deficit reduction. Central planners cannot possibly have enough information to subsidize jobs that will satisfy the public's needs and wants, and they're far more concerned with increasing revenue than reducing deficits.



Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.



It's funny to see Krugman referencing the Laffer curve, but at least he's half-right. Tax increases would depress the economy further. Unfortunately, so would continuing to create government make-work jobs that don't produce anything anyone wants.



So jobs now, deficits later was and is the right strategy. Unfortunately, it’s a strategy that has been abandoned in the face of phantom risks and delusional hopes. On one side, we’re constantly told that if we don’t slash spending immediately we’ll end up just like Greece, unable to borrow except at exorbitant interest rates. On the other, we’re told not to worry about the impact of spending cuts on jobs because fiscal austerity will actually create jobs by raising confidence.



You're told that if you don't slash spending that your credit will run out, because it's true. You're told not to worry about the impact of spending cuts not on new jobs, but on essential government services, because sovereign bondholders want their pound of flesh, regardless of the social impact. Once again, talk of "austerity" does increase confidence - for bondholders. Which leads us to the essence of what you're advocating...



But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt. But that’s not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts.



A false dilemma. Since politicians with short terms aren't interested in solving long term problems, the collapse in credit is inevitable. So the real dilemma is who gets to feed on the rotting corpse that is America. Will it be the American citizen, or will it be the owners of US bonds?

[Skeptic]

With austerity costing so much, Estonia might have no choice but to cut down on its spending.