Saturday, April 7, 2012

Spain and the myth of growth

In an article at Time, Michael Schuman talks about Spain's "death spiral," in the context of the government's response to declining economic indicators. Schuman sums those indicators up nicely:
(1) The government in Madrid expects the economy to shrink by 1.7% in 2012 – its third contraction in four years. (2) Unemployment continues to rise. It is now more than 23%, and youth unemployment is above a staggering 50%. (3) Housing prices are down 22% from their peak, and are likely to continue to drop, perhaps by 20% or more. This puts extreme pressure on the balance sheets of an already shaky banking sector.
He then proceeds to sharply criticize the government's response to this depressed economy, arguing that any type of so-called "austerity" measures amount to growth-killing measures. In true Keynesian fashion--in words that would make Paul Krugman proud--Schuman proclaims:
...What the austerity measures will achieve is further damage to Spain’s growth prospects. New taxes and reduced government spending will further inhibit any hopes that Spain’s economy can turn around. Unemployment will go up further, reducing tax revenues and inflicting even more suffering on the Spanish people. Thus the death spiral. By squelching growth, austerity is making it more difficult for Madrid to meet its budget targets and stabilize debt levels. So it introduces more austerity to meet those goals. And that in turn weakens growth further, pushing the targets farther off. And so on. And so on.
He rightly notes that demand for Spanish bonds is weak, but wrongly attributes the lack of demand to austerity measures. This is not to say that austerity measures should increase the demand, only that the two things lack the causal connection Schuman seems to believe exists. For using Schuman's logic, no cuts to government spending would...increase demand for Spanish bonds? And therein lies the paradox of current EU nation woes in places like Spain and Italy: all of their economies are shaky, no one sees them as sound investments and haven't for quite some time. But in order to not cut spending--which, for people like Schuman and Krugman, is the road to prosperity--they need to borrow more money.

And that, they can't do, unless they jack up yields on bonds. We already know the results of that game, because it's exactly what Greece did: jack up yields to borrow more and more until, finally, people realized they would never recoup their investments because Greece couldn't even pay the vig on the debt.

Let's be clear about this: no austerity measures and, in fact, increased spending (which is what Krugman and company think is the fix) doomed Greece. That nation should have been cutting its spending ten years ago, when there was still a chance to avert disaster. Yet, according to Schuman, austerity measures (and I'm cutting him a great deal of slack with the term) will doom Spain. The devil that you know or don't know, it would seem.

But not really. The problem here is that Schuman--like Krugman, progressives, and liberals around the world--are perpetuating a myth: that growth--in an economic sense--is a simple metric wherein more is always better. And once again, we have real-world empirical evidence--roundly ignored by this crowd--that demonstrates the untruth of this assumption. Consider, for instance, the "growing" economy of the Soviets in the fifties ans sixties. Sure GDP was up, but to what end? Warehouses of useless products, fields with under-utilized and/or malfunctioning farm equipment? Public works projects that accomplished nothing, other than keeping idle hands busy?

And yes, that's an extreme example. But it is what it is. Growth needs to be real in order to be growth. Borrowing money then spending it is not real growth. It just isn't. It can be, but not as a matter of course. And that's what Schuman doesn't seem to get. And eventually, no matter how you slice it, the bill on that borrowed money comes due. Greece has--with EU help--managed to write off huge chunks of that bill. Can the EU afford to let Spain do the same, a few years down the road? Because that's where things are going.

The idea that public spending is a solution here is very much the solution of a child: ignore problems and maybe they'll eventually go away. The adults in the room know--finally--that the time has come to actually address the real problem, in the EU, the United States, and elsewhere: out of control governments unable to run a tight financial ship, given to spend, spend, spend, and spend, come hell or high water.

Spain needs to stop spending what it doesn't have. Call it "austerity" if you wish, but it's a simple statement of reality and necessity.

Will it be painful for the population? Well...yes. Very painful. But the only way to fix the problem is to fix the problem. Hand-wringing angst and grade-school solutions that only address symptoms won't do anything in this regard.

Will such changes lead to "growth"? Yes in the long term, no in the short term. But the reverse--more spending--leads to phony growth in the short term and collapse in the long term. Which is better? Seriously. Because it seems like far too many prefer the latter these days.

Cheers, all.


  1. To continue in line with what you said, austerity alone is not a solution as well. In 2002-2003, during the recession, Israel cut the budget several times, but this didn't help much untill Netanyahu became finance minister and major cuts were coupled with real reform. Voila, two years later Israel had a budget surplus and strong growing economy. In short, economy is a comlicated beast with no easy solutions.

  2. I agree, Dm. But then, "austerity" is just the term critics are using. I don't know that it's being used correctly (in fact, I don't think it is, by and large).

  3. Oh, I know. Though in the Israeli case they really cut things. Very painfully. Not just limited growth of the budget, but cut all kinds of stuff. Lots of people were extremely angry at Netanyahu. Lots of populists made cheap points (some still do). Eventually most of them shut up and had to admit that Netanyahu's policies saved the pensions of the public sector, saved economy from collapsing and helped bring surplus, several years (untill the downturn in 2007) of growth approximately 1.5 times faster than US and helped the country skirt the crisis in 2007 and emerge with 5% GDP growth last year. Pretty impressive.