Wednesday, April 18, 2012

Alternatives to Austerity

European austerity is not causing renewed growth and it may not even be lowering debt ratios. Other than that, I guess it's going pretty well.

It's fun to rail against the dummies who thought austerity would work, but really, what else could the affected countries do? They can't use monetary policy because they don't have a currency and further fiscal expansion would cause the bond vigilantes to draw and quarter them.

Paul Krugman presents a complicated scenario where the ECB creates higher inflation and Germany runs a budget deficit to compensate for the austerity in Spain and Italy.

But Spain and Italy do NOT run the ECB or the German finance ministry!

The only alternative to austerity that the PIIGS have, that they can actually implement is to exit the Euro, devalue like crazy and hope for the best.  They are choosing austerity over this step.  I truly don't understand why, unemployment in Spain is well over 20% and climbing. It's hard to see how a Euro exit could make things worse.

In the West, we have spent decades getting conservative central bankers to be seen as the only proper type of central bankers, taking the Rogoff solution to the "inflation bias" problem highlighted by Barro & Gordon. But now we pretend to be shocked when these conservative bankers won't produce higher inflation.

Of course they won't, that's why they got the jobs to begin with!! If there was any chance they'd run higher inflation they'd never have been appointed.


Anonymous said...

Which raises one of my favorite questions, Why do we let people decide monetary policy? To paraphrase Milton Friedman, could a computer really do worse?

max said...

What austerity do you perceive in Europe? Certainly not balanced budgets and free markets. There is not one country aiming for that, they can't. Their populace doesn't allow for measures like these!

John Thacker said...

This is "austerity" in the sense of change in budget deficit, right, not absolute levels of budget deficit?

"May not even be lowering debt ratios?" Possible, I suppose, though I tend to put that in the "we're on the wrong side of the Laffer Curve" arguments.

Prudence said...

"Bond vigilante" is a bizarre way to refer to someone who declines to buy bonds that he doesn't expect to be repaid in full.

Michael said...

I like how these economists look at curves and differential equations and pretend the mathematics means something. Simple logic will do. Of course there will be high unemployment when the capital is so neglegently thrown out and misplaced by devaluation and loose money policy. Solution: more devaluation? These macroeconomists are so far removed from reality in their faulty calculations and graphs that they don't even know how logic works anymroe. Stop trying to copy us physicists--economics is not a science

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