(Note: comments weren’t working, they are now, so feel free to comment if you like.)
From the Globe and Mail (via Corrente):
While other countries were bailing out major companies by purchasing their shares and debt or taking ownership stakes, the German government took a different tack this year, bailing out payrolls instead, in order to keep layoffs and large-scale unemployment at bay and stave off the personal bankruptcies and home foreclosures that would result.
The result has been a political dividend for Ms. Merkel, whose ruling Christian Democrats face a Sept. 27 national election. In 2005, she was swept to office after a sharp rise in unemployment levels forced then-chancellor Gerhard Schroeder, a Social Democrat, to call an election.
This time around, she can boast that unemployment has held steady for two straight months, at 7.7 per cent, below the Eurozone average of 9.5 per cent. Without the kurzarbeit, Germany would have seen unemployment rise.
It has also turned the attention of world governments to Germany, where some forecasters believe the economy is recovering faster than among its neighbouring countries. If growth can resume next year, Ms. Merkel’s payroll-boosting scheme will have paid off, saving the country from the worst effects of the downturn.
This is a crude version of what I was arguing for last year, by the way. I wanted support for homeowners and so on, which would have put a floor under the crisis. The US situation, since it was the epicenter and originator of the paper behind the crisis, required different actions, but the basic idea of supporting ordinary people so there wasn’t a demand collapse and a spiral of bankruptcies and foreclosures was the point.
What we’re seeing right now in the US is that foreclosures are up, consumer credit is crashing through the floor, and employment is still declining. The engines of demand in the US economy area almost entirely government driven at this point, which is fine, but because ordinary people weren’t helped, the requirement is for that stimulus to continue (mainly through Afghanistan once the stimulus bill runs out).
A stimulus is supposed to kick a country out of a recession or depression, not be required indefinitely. And right now, to slightly change what we used to say about the Bush economy, the economy is “isn’t dying, as long as you don’t unplug the life support”.
Welcome to Japan, 1990. Get ready for a long grey suck. All because Obama, Bush and Bernanke thought that specific financial corporations were identical to banking, and that throwing money at banks was more important than fixing the underlying economic problems created by financialization and bubbles.
Formerly T-Bear
Was this not to be expected, the long grey suck, that is what was designed, a complexly interacting system, a fraudulent and bankrupt economic guidance theory, academic arrogance hindering alternative theory, a public educationally lobotomized into cretinish abilities with which to comprehend their condition and so severely overworked as to not have the energy or time to asses their condition artfully hidden beneath generations of propaganda and disinformation; and attempt to find a solution in a political system corrupted to the core into promoting the antithesis of the public welfare for private gain. The needed quality of excellence in expertise and analysis does not exist for the extended public, even if there were a functioning political system to handle the problem; public discourse does not exist, neither does a common untainted public language. It is an edifice built upon sand and cannot last.
However, there may be a Guinness World Record in it, “Fastest Collapse of Empire”.
jo6pac
I’ll second that, Iwas telling anyone that would listen (all 2 of them) it would have been cheaper and better to save the worker. Most Americans figured it out that they to got greedy and would have pulled back to save the few things they really needed to ride this out. I hope the new govt in Japan can slow pull the country out the mess they’re in. There isn’t a snowballs chance in Hell that the present WH is going to do anything different about the problem than the past one did. I see the same players still stealing the money. Oh well I’ve gone long on rice and beans and live as close to the ground as I can but I don’t think at 60 yrs of age I’ll see this country recover if this is the type of leaders we’ll have in the future. It’s all about greed and not about the citizens of the country. Thanks Ian, time for wine.
jo6pac
Lex
I’m coming to the conclusion that the long grey suck is the best we can hope for at this point, with a Sovietesque collapse seeming more likely…except that i don’t think the US will handle such a situation anywhere near as well as Russia did.
jo6pac
Ian did you see this, it looks like Japan will pull away from us to save themselves. I wish them luck.
jo6pac
http://www.telegraph.co.uk/news/worldnews/asia/japan/6174814/Incoming-Tokyo-government-threatens-split-with-US.html
Ian Welsh
Didn’t see that, but it’s what I’ve been expecting. The whole “subsidize the dollar to get exports” thing has not been working for them for some time.
senecal
Let’s not make too much of the difference between Angela Merkel and BO. Sarkozy also took a much different tack at the start of the crisis, openly breaking the rules of the neo-liberal order by promising to protect French businesses first. Both countries are part of the international capitalist order, and both supported the illegal NATO war against Yugoslavia, and now against AFghanistan. France, however, has a more militant labor history, and Germany has an electorate accustomed to enlightened social policy, so that is perhaps why their official responses could be more progressive than ours.
And then there’s also the factor that, the US being the principal engine of the global economic collapse, it had to devote the most resources to righting the ship.
Still, I think Ian’s observation and the comments above are right; these are just mitigating aspects.
Mandos
I have been shaking my head for about nine years starting from the point when Dems were yelling at Naderites for claiming that the (D) and (R) parties were the same. Well, they managed to convince me that indeed, the (D) was marginally better, but the margin is small enough that it doesn’t make a lot of difference to the big picture.
But now that we’ve shown this for real…
Mandos
And righ on cue.
Mandos
Er, “right”, doh.
Ian Welsh
If DeLong’s going to make the case, I guess he should fully make it. What’s the cost of losing those jobs – in terms of taxes (local, federal, state), in terms of services to the laid off people, in terms of reduced earnings in the future and in terms of reduced consumer demand.
What’s the real cost?
At what point do consumer savings, no matter how much, get swamped by the loss of jobs?
DeLong isn’t half as smart as he thinks he is, and the answer to such questions isn’t a quarter as obvious as he thinks it is, but because he thinks it is obvious, he doesn’t do the work to prove it.
Mandos
DeLong doesn’t prove it because he believes he and the economics profession have spent dozens of PhD theses proving it, and he’s written countless blog posts on the subject. But I mean the case is that, as long as those workers can spend (via the DeLong tax that would never ever be charged and redistributed in a million years), demand would continue, and now they’re freed up to find other lines of work that China does not do as well.
Whatever those are. Until Chinese labour becomes expensive.
This argument is pretty foundational to the neoliberal consensus. Do you still remember our old friend Stephen Gordon? Back in the day, I must have spent weeks of my spare time on rabble and at TaW and at his blog fighting it out. The final argument that all the neoliberal defenders bring up is that trade barriers limit the ability of the Chinese working class to export its way out of poverty.
Don’t laugh. It is considered reasonable to argue (and has been argued passionately and repeatedly) that it is the moral imperative of the American middle class to accept uncertainty and unemployment to lift the Chinese poor out of poverty. That financiers and CEOs benefits from this is but a…side effect.
In fact, it has been proven mathematically!!!
Of course, American workers will be compensated. When financiers and CEOs get around to it. Some time next century.
Mandos
But I’m very passionate about trade because this trainwreck, from my point of view, was pretty predictable from the time that NAFTA signed or before—the big, public victory of the neoliberal consensus over workers and farmers in North America.
Health care, media, the war in Afghanistan, and everything else are fundamentally connected to it
The problem with our economic intellectuals is that they suffer (perhaps due to the incentive structure of academia?) from a disease I call “freakonomicism”. Freakonomicism is an obsessive desire to find minor perverse results from an obvious policy and blow them all out proportion. So the obvious result of free trade—a race to the bottom—becomes clouded with the economic equivalent of arguments about how many angels can dance on the head of a pin.
Ian Welsh
Yeah, these people are confused. They think an accounting identity (cash inflows and outflows between countries with different currencies must be equal, sort of) is the same as what happens in the real world (Chinese are buying debt, not real American products, and in exchange they are industrializing).
I have seriously considered (and probably should, but probably won’t) learning the necessary math and economics to do this in a form they might be willing to listen to. I figure it’s about 2 to 3 years work, but I’m not sure it’s worth it to me personally (there is, rrrm, both a real cost and an “opportunity cost”).
It’s maddening how economists won’t listen to people outside the profession, even though their own track record on almost everything meaningful is absolutely atrocious.
Mandos
I can’t emphasize enough how enlightening the discussion has been at the comments to DeLong’s post, which continue to expand…
Ed
What is defended as “trade” these days isn’t really the sort of international trade Ricardo would recognize. Its labor and regulatory arbitrage, or regulatory avoidance.
There really is no point in taking the trouble to enact some sort of environmental regulation, or allow unions to organize, and then allow businesses to avoid following the regulation or dealing with the union by shifting operations to another country, and then selling their products in your country. If the regulation is really justified, then all businesses selling in your country should be required to follow it. This includes businesses based in other countries that want access to your market. We don’t allow imports of poisoned food after all (well actually we do), so the same principle should work in other areas.
ballgame
Great post, Ian. Great comments, Mandos.
Formerly T-Bear
Going back to the Kennedy/Johnson administration the major economic concern was balance of payment problem; before oil and petrodollars, there were accumulating dollar stocks due to trade imbalance with recovering Europe and great persuasive effort was made to rectify that imbalance, selling more, buying less. Needless to say, large quantities of free funds were sloshing about not tied to any economic process, demanding rent for their presence. These were joined by petrodollars particularly after the first oil boycott and quadrupling of oil prices in the early seventies. Concurrently, the Japanese commercial success added another lake of funds, sloshing about looking for rents as well. About the only safe investment then were either US stocks or government treasury bonds. In short order, Wall Street in its inimitable wisdom produced the arbitrage sacking of corporate largess, most often funds earmarked for employee retirement and corporate retained capital assets. The crescendo of this was the Junk Bond Era, absorbing large pools of funds to commit economic rape and pillage; funded and absorbing a large amount of international liquidity and providing the required rent on those funds. The ultimate collapse of the process, brought on by corporate “poison pill” defense and extermination of corporate cash cows resulted in a horrendous problem, how to attract foreign funds, provide the rent to retain the funds, and finance the economic system. For a while, the equity markets provided a non-governmental sponge for the international funds in parallel with governmental paper but, soon the equity market was becoming unable to sustain the rent payments required leaving governmental paper the sole safe refuge for international funds. The consequence of equity bubbles put the shy on international considerations as a sustaining source. The only attractor for international funds was governmental debt. The Reagan administration took full advantage of this and in short order turned the US from the world’s greatest creditor nation into the worlds greatest debtor nation in quick order. Still there was not enough debt to absorb the accumulating international funds looking for safety and rent. These funds overspilled into and inflated the credit markets, primarily mortgage as it provided the fastest and easiest way to meet the magnitude necessary, backed by equity and concurrently the unbacked by asset was also inflated by the return on high risk. Both these answers have now collapsed. The problem remaining is how to attract these international funds after the financial collapse has occurred. The equity of the nation has been bought, most assets are obligated by debt already owned. What else is there to sell but the future and the nation does not have the future’s agreement for the deal.
In the above process, the actual economy was abused and neglected. Just as monopoly and near monopoly distort and subvert the function of the marketplace, likewise the impact of monopolistic practices and economic power imbalance the function for all other players in the economic process that haven’t the equalizing economic position; labour is left bereft of wages, land rent is subordinated, capital (savings and investment) is deprived of interest, economically suborned into the profits of monopolistic marketplace corporate entrepreneurship. Compounding the situation is the political collapse and disfunction of government to the point of disutility, and a population, fattened on incredible beliefs, uneducated and unable to contemplate their condition, and the moorings of reality eroded by generations of propaganda and disinformation until no compass or history exists, only the waving of flags has any impact.
I stand by my comment above, all the best…….
Formerly T-Bear
Since it seems this post is effectively ended (mea culpa?), this was over at Agonist, if you are interested.
No economic education …
… teaches credit (debt) is a tool to be used cautiously and carefully. That education comes from the school of hard earned experience. This tool (credit) is limited to what it can do and still remain a tool. Outside those limits the tool can become a destructive weapon, a machete comes to mind, useful for progressing through jungle, threatening, damaging or deadly in a personal confrontation. Credit as used in mortgages is a tool with which to buy time to earn and purchase (usually) real estate. The rent(edit: income) for credit is called interest that pays for the use of the capital and covers the risk to that capital for the time period. By this, capital is a tool that has the ability to acquire other economic goods (or services); land, labour, other capital (tools), or facilitate entrepreneurship with which to fulfill the economic needs, wants and desires (needs are the basic necessities for life, wants fulfill some level of comfort, and desires are for economic goods (and services) beyond comfort (e.g. status)). When capital is expended directly to acquire needs, wants, or desires, it can easily become a weapon of destruction as neither need, want, or desire has any economic return (edit: income) other than motivating economic activity; only land (rent), labour (wages), capital (interest), or entrepreneurship (profits) provide economic returns (edit: income). In short, the preceding is a concise economic description of economic system and with a few other terms can describe all economic activity. The study of economics therefore is the study of human ecology and the economic superstructures that have been built upon that ecology.
Xxxxx September 17, 2009 – 3:47am
Any opinion?
Ian Welsh
Not bad, but a little incoherent. Credit is paying now for something by promising to pay more in the future, in essence. If your total utility is greater than the cost of buying something on credit now, than it would be if you waited, then it makes sense to use credit. Otherwise it doesn’t. There are a number of caveats to that, the simplest of which is simply “credit should almost never be used for non-essential short term consumption”.
Formerly T-Bear
Thanks Ian, I commented again with edits at SP’s Credit is Debt where it was originally intended. Hope the revision helps reduce the incoherence; it should be taken in context of the other comments there as well. Your utility as measure for the use of consumer credit is excellent. In all, mostly same thing, differing presentations then?
All the best……