Friday, May 18, 2012

Krugman Right on Europe for the Wrong Reasons

In yet another uproarious screed, this one purporting to address the slow-motion global financial meltdown, New York Times columnist (and former Enron advisor) Paul Krugman lectures German Prime Minister Angela Merkel on the efficacy of hyperinflation as a solution to the Eurozone’s current predicament.

The Times entitles Krugman’s essay “Apocalypse Fairly Soon,” and it contains all of the usual blather and mendacity that are reliable features of Krugman’s work.  Ever the utopian leftist, Krugman prefers that the Europeans submerge their national sovereignty into a single European political entity, but even he has to admit the unlikelihood of such a happy occasion.

He accurately summarizes the fiscal folly of the Eurozone, noting that upon its inception ten years ago, “[m]oney poured into Spain and other nations, which were now seen as safe investments; this flood of capital fueled huge housing bubbles and huge trade deficits.”

But once the financial collapse hit world markets in 2008, the bursting of those bubbles hit the periphery of Europe hardest, “causing severe slumps in the very nations that had boomed before.”
At that point, Europe’s lack of political union became a severe liability.  Florida and Spain both had housing bubbles, but when Florida’s bubble burst, retirees could still count on getting their Social Security and Medicare checks from Washington.  Spain receives no comparable support. So the burst bubble turned into a fiscal crisis, too.
Europe’s answer has been austerity: savage spending cuts in an attempt to reassure bond markets.  Yet as any sensible economist could have told you (and we did, we did), these cuts deepened the depression in Europe’s troubled economies, which both further undermined investor confidence and led to growing political instability.
And here the hilarity takes off.  Krugman overlooks the mounting federal deficits that are the only reason “retirees could still count on getting their Social Security and Medicare checks from Washington.”  Ever the blind Keynsian, he pretends that somehow Washington is more financially solvent than Brussels. 

The Recovering Bureaucrat, admittedly not a “sensible economist” like Krugman, marvels at the assumption underlying this observation.  The fact that the current acknowledged deficit is 100% of GDP is something Krugman regularly waves away with a sneer at the untutored Tea Party Neanderthals.  The consensus forecast of national GDP growth is 2.2% this year, and 2.7% in 2013—and remaining in the range of 2-3% for several years thereafter.  And yet most forecasts of the growth of our national debt—which is even tougher to pin down because of the number of dynamic factors that must be taken into account—project a range of 150-200% of GDP by 2020.

These forecasts assume the full implementation of Obamacare, but we already have hard evidence that previous guesstimates have been low, so the RB doesn’t have much confidence in the assumptions being applied.

The point is that it is very difficult to see how anybody can be optimistic about our public financial well-being under current conditions.  How can Krugman and his fellow Keynsians be so blithe about those checks being sent to retirees from Washington, when the soundness of the dollar is steadily being undermined by the too-slow growth of the global economy to finance all this debt.

The truth is that Krugman doesn’t expect this to happen, which is why he counsels Merkel and her sound euro allies to turn to the inflationary “solution.”
Italy and, in particular, Spain must be offered hope—an economic environment in which they have some reasonable prospect of emerging from austerity and depression.  Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany).
Both the central bankers and the Germans hate this idea, but it’s the only plausible way the euro might be saved.  For the past two-and-a-half years, European leaders have responded to crisis with half-measures that buy time, yet they have made no use of that time.  Now time has run out.
This is the game of the "progressive" utopians.  Rather than admit that the dream of a European political union is out of reach, rather than unwind the Eurozone in an orderly fashion, rather than renegotiate the global financial system, Krugman and his allies would simply print money to paper over the problems.

Krugman is as cavalier about inflationary dynamics as he is about deficits and the debt.  Like the Bourbons of Talleyrand’s famous aphorism, Krugman and his allies have learned nothing and forgotten nothing.
Think of it this way: Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists.
Europeans have been attempting to “bring peace, prosperity and democracy” for themselves for a long time, mostly under nationalistic guises.  The failure of the European Union is more the result of overreach than sentiment, of fear than realism, of misunderstanding than sober judgment.  And we should all applaud them for their efforts; after all, there was never much of a chance that it would succeed, but they were willing to give it a shot anyway.

But long before the necessary conditions for success could arrive—if they ever could have—the world shifted and so undermined even the slim chances for the experiment to endure.  And so the Eurozone cannot be sustained as it was originally designed.


Why Europe Won't Work
 
We are in an unprecedented global political economic transformation.  Dynamics of every kind—social, cultural, technological, political, financial, market—are accelerating in ways for which we have few historic analogues.  They interplay in novel fashions, and impact one another with unanticipated results.

As the Industrial Age gives way to the Information Age—even while billions remain in the Agricultural Age—none of us can foresee except in the most tentative and rudimentary of ways what kind of political economy will emerge.  If Ray Kurzweil’s prediction of the dynamics producing a putative Singularity are even only partially true, it would behoove all of us to adopt some humility in looking ahead and devising public policy.  Acceleration of the rate of change is something for which almost none of us is prepared.

The European Union was a political experiment of the Industrial Age, but it was built upon the tribal and nationalist identities of the feudal era.  The Age of Reason that gave birth to the nation state and the industrial economy has never fully replaced the human tendency toward local and tribal identity.  It certainly retains the possibility of doing so, and this could be greatly aided by the technologies of the Information Age. 

But we should have learned by now that these things take time or luck.  The United States only avoided the tribal dynamic by virtue of immigration and conquest.  We were blessed with the possibility of establishing our nation state upon an advanced Enlightenment Idea—that all men are created equal—in a vast continent settled by a relatively small number of hunter-gatherers who could offer no effective opposition.

The political economic entity of the United States that Krugman so blithely takes for granted is itself still in the experimental stage—of longer duration and upon more solid footing that the European Union admittedly—but as Jefferson and other Founders warned, its success can never be presumed.

This is because our founding principles are universal in their application, which made America, in Ben Wattenberg’s insightful phrase, the first universal nation.  The fragility of this experiment in self-government, in spite of the robustness of our astonishing economic output over the past two centuries, derives in part from our failure to appreciate the global appeal of our foundational principles.  America does not belong to Americans; it belongs to humanity.  Those of us fortunate enough to live here hold it in trust.  Unfortunately, we no longer recognize this responsibility as consciously as previous generations did.

And this is because, even with the accident of history, we Americans are as human as the rest of us.  Too many of us Baby Boomers became self-indulgent, and we see the results in the fatuousness that passes for learned political insight and the vacuousness that masquerades as high culture.  That people take Paul Krugman seriously is just a symptom of our narcissism; that as researcher BrenĂ© Brown has observed “we are the most in debt, obese, addicted, and medicated adult cohort in American history” is no accident.  We became a generation of trust babies, living on the wealth created by our parents and grandparents.

Tribal instincts may doom the European project; narcissism plagues the American one.

Of course we have done great things, but those marvels and breakthroughs are threatened by our unwillingness to face facts and return to founding principles.

Whether apocalypse will come fairly soon is not foreordained.  As we become increasingly willing to do the hard work of facing the truth and surrendering our addictions to the false security of policies and institutions that no longer work, perhaps we can avoid the temptations of even more desperate attempts, like consciously inflating already tenuous currencies, to stave off the day of reckoning that even Krugman knows is coming.

“All of us, then,” Krugman concludes, “have a big stake in European [Union] success—yet it’s up to the Europeans themselves to deliver that success.  The whole world is waiting to see whether they’re up to the task.”

No.  The whole world waiting is the problem.  The Europeans are not up to the task. We are in this together, and the only way out is forward.  The question is, are we up to the task of evolving toward our potential, rather than clinging to bankrupt institutions?

No comments:

Post a Comment