Tuesday, May 24, 2011

Economists from the Left and the Right Agree: Neither the U.S. Nor Europe Is Dealing With the Real Problems...

Economists from the Left and the Right Agree: Neither the U.S. Nor Europe Is Dealing With the Real Problems...

Today, economists from both sides of the political spectrum said that no one in the U.S. or Europe are dealing with the real problems.

Niall Ferguson told Bloomberg that no one has the political will to deal with Greece, and so Europe might experience a crisis as big as the 2008 crash in the U.S.:


Paul Krugman argues that austerity has failed in Europe, but that the European Central Bank " "i[s] just not willing to face up to the failure of its fantasies" and to restructure Greek debt.

(In more Europe news, Moody's will issue a big credit warning on 14 of the UK's 18 biggest banks tomorrow).

And in the U.S., former Reagan head of the Office of Management and Budget - David Stockman - says that both Democrats and Republicans are now advocating for default in America, since Democrats won't compromise on spending and Republicans won't compromise on taxes. (Before Dems label Stockman as a radical anti-taxer, remember that he recently said that the Bush tax cuts were "the biggest fiscal mistake in history", and that extending them won't stimulate the economy)

What is absurd about the above Republican v Democrat quarrel is that aggregate demand becomes a political football. That is, people get kicked out of jobs and out of their homes because of a bunch of squabbling idiots in Washington. The question as to what the optimum level of demand is, is a technical question best decided by economists (not that they’re perfect, of course). In contrast, the decision as to what proportion of GDP is grabbed by government, and how that money is spent is a legitimate political decision, best left with politicians.

In other words it’s not just monetary decisions that central banks (or some independent committee) should take. They should take aggregate fiscal decisions as well. At the moment, the US economy is effectively a car with two steering wheels, one controlled by a husband and the other by a wife in the middle of a marital breakdown. And ... in Washington's case -- the idea that the Republicans and Democrats are going to put aside their party politics and drive through real change is ... well ... not going to happen.

We are going to have to unelect the lot of them to get rid of them....

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