Europe is committing financial suicide

[financeguy]

Europe’s Fiscal Dystopia: The “New Austerity” Road to Financial Serfdom
Global Research, June 25, 2010
by Prof. Michael Hudson

Massive Cutbacks in Public Spending

Europe is committing fiscal suicide – and will have little trouble finding allies at this weekend’s G-20 meetings in Toronto. Despite the deepening Great Recession threatening to bring on outright depression, European Central Bank (ECB) president Jean-Claude Trichet and prime ministers from Britain’s David Cameron to Greece’s George Papandreou (president of the Socialist International) and Canada’s host, Conservative Premier Stephen Harper, are calling for cutbacks in public spending.

The United States is playing an ambiguous role. The Obama Administration is all for slashing Social Security and pensions, euphemized as “balancing the budget.” Wall Street is demanding “realistic” write-downs of state and local pensions in keeping with the “ability to pay” (that is, to pay without taxing real estate, finance or the upper income brackets). These local have been left unfunded so that communities can cut real estate taxes, enabling site-rental values to be pledged to the banks of interest. Without a debt write-down (by mortgage bankers or bondholders), there is no way that any mathematical model can come up with a means of paying these pensions. To enable workers to live “freely” after their working days are over would require either (1) that bondholders not be paid (“unthinkable”) or (2) that property taxes be raised, forcing even more homes into negative equity and leading to even more walkaways and bank losses on their junk mortgages. Given the fact that the banks are writing national economic policy these days, it doesn’t look good for people expecting a leisure society to materialize any time soon.

The problem for U.S. officials is that Europe’s sudden passion for slashing public pensions and other social spending will shrink European economies, slowing U.S. export growth. U.S. officials are urging Europe not to wage its fiscal war against labor quite yet. Best to coordinate with the United States after a modicum of recovery.

Saturday and Sunday will see the six-month mark in a carefully orchestrated financial war against the “real” economy. The buildup began here in the United States. On February 18, President Obama stacked his White House Deficit Commission (formally the National Commission on Fiscal Responsibility and Reform) with the same brand of neoliberal ideologues who comprised the notorious 1982 Greenspan Commission on Social Security “reform.”

.....(cont'd)

Europe?s Fiscal Dystopia: The ?New Austerity? Road to Financial Serfdom

 

[the iron horse]

How this plays out will be interesting.

 

[A_Wanderer]

The downstream effects of austerity cuts seem quite serious

Science funding cuts could lead to lost generation of scientists, warns Krebs

It will take years to restore the scientific talent lost abroad as a result of cuts in UK science funding, says John Krebs, chair of the House of Lords science and technology committee

The "brain drain" that could result from a deep cut to the UK's science funding would leave the country with a missing generation of scientists, according to John Krebs, chair of the House of Lords science and technology committee.

Responding to reports in the Guardian today that scientists were already planning to leave the UK ahead of proposed budget cuts that could see government funding of research cut by around 25%, Krebs said: "The message is loud and clear, namely that talent is highly mobile and talent goes where the resources for research are best supplied. This is not about people wanting to earn more money, it's about people wanting to have better equipment, better facilities, more research support to carry out their science."

He added: "If we do end up haemorrhaging talent, it will take a very long time to restore that. Many universities will tell you that, as a result of cuts implemented during the Thatcher period, there is a gap in the age profile of academics in many subjects. Those people who would now be in their mid-50s, there are just fewer of them. That gap persisted for a whole generation. This is not something where you turn the tap on and off."

Scientists in particle physics, stem cells, cancer research and ophthalmology at some of the UK's leading universities told the Guardian this week that they saw better opportunities overseas as countries such as the US, Canada, China and Australia planned to invest increased sums in science as part of their long-term strategy to reduce their budget deficits.

Imran Khan, director of the Campaign for Science and Engineering, said: "Once our researchers go abroad, that's it – we're not going to be getting them back anytime soon. And if we lose our hard-won reputation as a global research hub, we're not going to attract foreign researchers either. A brain drain on this scale could take decades to fully recover from, especially when our competitor nations are actually increasing their own investment."

All government departments in the UK have been asked to prepare for deep cuts in their budgets as part of the government's austerity drive. Scientists have spent months warning that such deep cuts to the UK's science infrastructure would have devastating long-term effects, forcing the country out of the "premier league" in many fields of research. Last week, Krebs wrote to science minister David Willetts, to give examples of several leading universities that had already lost scientists to other countries and other cases where universities had found it difficult to recruit the best talent from overseas.

David King, former government chief scientist and now director of the Smith School of Enterprise and the Environment at Oxford University, said the coalition government's proposed cuts to science were ironic, given how often he was asked by the governments of countries including Italy, Japan, Germany and France to explain how the UK had risen to such a high level in science.

"[They asked] how did we create this amazingly efficient science base that produced more science outcomes whether you measure by citations or prizes per pound invested in the science base than any other country in the world? We are the envy of many countries. The French have tried, with successive governments, very hard to imitate what we did and they just haven't come up with a way to do it. We have this remarkable efficient science base producing excellent work from a relatively small percentage of our GDP. That is the prize that we have, and all of that is now potentially at risk."

Simon Denegri, chief executive of the Association of Medical Research Charities said that it was "extremely worrying" to hear so many of Britain's leading scientists talk so despondently about the prospects for UK science. "But who can blame them? There is no doubt that their loss will have a significant impact on important work across many fields. A great deal of this activity is supported by funding from medical research charities. And I am sure the public will be concerned that it is going to be ever harder for their donations to make a difference if we allow our international standing in science to drift away like this.

"I hope this early sign that belief is beginning to seep from the system will be seen as a wake-up call by the coalition government. They have much to do to build confidence and demonstrate that the future of science is safe in their hands."

Mark Walport, director of the Wellcome Trust, echoed concerns that funding of basic science research was crucial to maintaining UK industry. Some of the best biomedical science in the world was going on in the UK, he said, but "it would be a tragedy if government didn't continue to be a good partner to industry and charities, with the resulting benefits to the health and wealth of the nation."

Science funding cuts could lead to a lost generation of British scientists, warns Krebs | Science | guardian.co.uk

 

[Kieran McConville]

Hang on... I thought you were in favour of cuts to spending?

 

[financeguy]

Hang on... I thought you were in favour of cuts to spending?

You're assuming I agree with every article I post!

But, as regards my personal opinion, you're not wrong in suggesting I'm generally fairly sceptical of Keysianism and more inclined to the Austrian school of economics - but I am also pragmatic.

It was not the Austrian school that got us into the current mess - and their solutions may not necessarily work in the short term to get us out of it. Pump priming may work temporarily.

The European authorities have gone from extreme monetary laxity to extreme hair-shirt monetarism in the space of a few short years.

 

[A_Wanderer]

It may be a reference failure but I have changed my mind on quite a few issues over the past three years.

 

[Kieran McConville]

You're assuming I agree with every article I post!

Mostly, yeah. Mostly they do, or did, seem to generally follow a certain line.

But, as regards my personal opinion, you're not wrong in suggesting I'm generally fairly sceptical of Keysianism and more inclined to the Austrian school of economics - but I am also pragmatic.

It was not the Austrian school that got us into the current mess - and their solutions may not necessarily work in the short term to get us out of it. Pump priming may work temporarily.

The European authorities have gone from extreme monetary laxity to extreme hair-shirt monetarism in the space of a few short years.

yes, it does seem that the extremes are the problem in the short term.

 

[Salome]

the 7 fat, 7 lean years parabel has proven apt for western economy for quite a while
there's no way to turn this crisis around quickly
teaching some prudency is not a bad thing though chances are we'll go a it too far somewhere
China's recent move to back Greece makes me more optimistic

 

[yolland]

How Well Is Fiscal Austerity Working in the UK? - Tyler Cowen

With the Wednesday release of a mediocre GDP report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure. Let’s look at the timing of the cuts:

So far, about £9 billion of the government’s fiscal tightening has occurred. However, around £41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5.​

Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place. So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been.

A lot of the weak GDP report is blamed on construction, with some excuses drawn from snowstorms. There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built. Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt. Weak UK growth dates to some time back. Also recall that in many open economy Keynesian models, fiscal policy aggregate demand effects are to some extent—or completely—offset by exchange rate movements. And the fiscal multiplier is basically zero when the central bank targets inflation. Furthermore it is not obvious that the UK has been in a liquidity trap. When it comes to drawing Keynesian conclusions about practical fiscal policy, the theory here is a house of cards.

The UK economy suffers from a more serious technological stagnation than does the United States, in this case more forward looking than backward looking. Their pharmaceutical innovation seems to be drying up, they are overspecialized in finance, the “residential tax haven” status of the country may not yield continuing growth at high rates, tourism is OK but not enough, and their manufacturing base eroded some time ago, with nothing like a German-style comeback.

...Two other considerations:

1. The case for the cuts is not that they will spur growth, but rather forestall a future disaster. That’s hard to test. A second part of the case is that not many political windows for the cuts will be available; that’s hard to test too. On that basis, it’s fine to call the case for the cuts underestablished, but that’s distinct from claiming that poor GDP performance shows the cuts to be a mistake.

2. Let’s say the cuts lower government consumption and raise private consumption, and that government consumption is wasteful but private consumption isn’t (and long-run growth is given by the Solow-like expansion of the international technological frontier.) That’s a good case for making the cuts, but they still won’t show up as higher GDP. The government consumption is valued into GDP figures at cost, so even cuts proponents with a good case don’t have to be predicting higher GDP.

I doubt if the UK fiscal austerity program will much boost their growth rate, which is likely low in any case and for non-Keynesian reasons. Simply citing a low UK growth rate is not a test of their fiscal policy, for a number of reasons detailed above.

 

[melon]

But, as regards my personal opinion, you're not wrong in suggesting I'm generally fairly sceptical of Keysianism and more inclined to the Austrian school of economics - but I am also pragmatic.

In pragmatic defence of Keynesian economics, I believe that, whilst it entirely favours spending the way out of a recession, it also advocates being lean during prosperous times. Of course, that has certainly not been the case over the past generation; government spends and spends and spends in all economic conditions nowadays.

 

[financeguy]

In pragmatic defence of Keynesian economics, I believe that, whilst it entirely favours spending the way out of a recession, it also advocates being lean during prosperous times. Of course, that has certainly not been the case over the past generation; government spends and spends and spends in all economic conditions nowadays.

Very true. With the possible exception of Iceland, my own country was perhaps the most egregious offender of all. We had a finance minister who reduced taxes in a boom while presiding over a massive increase in the size (at least in financial terms) of the public sector, boasting 'if I have the money, I spend it'. He used to lecture the Germans about how to run an economy. God, when I think of it, how stupid we Irish must look now.

 

[the iron horse]

"God, when I think of it, how stupid we Irish must look now."

The Irish never look stupid; They are always in tune to the mess of the world.