Torrents of Denial

The news on the financial front continues to worsen, as Europe careens toward a break-up of the Eurozone, and China faces a contraction of its hitherto torrid growth rate.  The United States remains mired in paralysis as the deadline to address the “fiscal cliff” of the expiration of the Bush tax cuts and implementation of the budget cuts agreed to during the last debt ceiling debate looms.  Here in California Governor Jerry Brown and the Democratic legislative leadership remain dogmatically committed to the Greek model of tax increases and budget cuts.

The common thread of all of these situations is the resolute and blind adherence to outdated political economic systems that are no longer able to stimulate the dramatic expansion of wealth that is otherwise possible.  What Professor Walter Russell Mead dubs “the blue state model” is commanding allegiance in defiance of the evidence that it has long since outrun whatever usefulness it may have had in its heyday in decades immediately following World War II.

The sad news is that, for the most part, this stubborn denial of reality is a bipartisan matter.  In Europe, commitment to the Eurozone has been spearheaded by Prime Minister Angela Merkel, leader of the center-right Christian Democratic Union.  While recent elections in Greece and France has strengthened leftist resistance to Merkel’s insistence on budgetary discipline as the way to right the euro’s ship, only the far-left in Greece has been willing to champion secession from the Eurozone.  Newly elected French President François Hollande remains firmly committed to his country’s participation in the EU.  

In the U. S., the national Democratic Party is in the solid control of President Barack Obama, who has finally discarded his centrist, “post-partisan” pose to aggressively champion maintenance of the blue state model of increasing government interference in the private sector.  Unlike the two different approaches of the Eurozone partisans, Obama would increase taxation and federal spending.  While his Republican rival Mitt Romney denounces “Obamanomics,” he has yet to spell out in stark terms a compelling alternative that would unleash the entrepreneurial might of the United States.

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. 

Hell Freezes Over: David Corn Gets One Right

David Corn, veteran opinion writer for the 60s throwback Mother Jones, yesterday wrote a column about the pending collapse of the euro with every word of which the Recovering Bureaucrat agrees.  This has never happened before.  Perhaps, like President Obama on the subject of same-sex marriage, Mr. Corn's philosophy is evolving.  We can only hope.

What next?  Paul Krugman making sense?

European Elections: Things Just Got Wilder

Today’s election results in France and Greece are bad news for the Obama campaign.  The narrow victory of Francois Hollande over Nickolas Sarkozy in the French presidential election throws a serious monkey wrench into the machinations of Mr. Sarkozy and German Prime Minister Angela Merkel to prop up the euro.  Although Mr. Hollande promises to meet with Ms. Merkel at the earliest possibility, he is on the record as pledging to renegotiate the accord.

In early reporting in the wake of Hollande’s victory, Voice of America reports an observation by Charles Kupchan, a Europe expert at the Council on Foreign Relations in Washington.

“He’s called for renegotiating the fiscal pact,” says Kupchan, referring to the economic agreement forged by the European Union to stabilize the euro currency.

“Hollande’s call to reopen that pact, and to focus more on stimulus than austerity, will certainly win him some support in France and in other European countries—notably Italy, Spain, Greece, Portugal—but it could spell trouble with Berlin,” Kupchan adds.

The bravado of this commitment will be made hollow if he follows through on his campaign promises to raise taxes on the rich, freeze fuel prices, increase welfare payments, and hire 60,000 new teachers.  Squeezing the already sluggish French economy to achieve these goals will only weaken it further.

Also today, Greek voters gave a stunning rebuke to the ruling PASOK socialist party, whose share of the vote dropped from 44% three years ago to 14% today.  The center-right New Democracy party took first place, but with a paltry 20%—half its previous total.  Fringe parties made great gains at the expense of these major parties, further exacerbating the political chaos.

Greece has been caught between the devil and the deep blue sea since it agreed to intense austerity as the price of a bailout from the European Central Bank and its patrons.  As long as it puts remaining in the Eurozone ahead of national economic health, the Greeks are facing decades of increasing poverty. 

The fragmented results mean that New Democracy will be hard-pressed to form a coalition government—and it doesn’t have much time.  The new government faces an immediate test next month when it will have to decide whether to approve another €11 billion in spending cuts for the 2013-4 budget to keep the bailout funds flowing.