The euro area is entering recession again. It’s tempting to call this a double-dip recession, but that is misleading. The first recession never ended: the EU’s output is still below the pre-crisis peak. But still, things are getting worse. It is the Southern European countries and Ireland that are dragging down European growth; but the recession in Europe’s South is now also beginning pull down Germany. Europe’s answer to the crisis has been an orthodox one: sound public finance and ‘internal devalution.’ Internal devaluation is the modern way of saying ‘cut wages.’ And so the Southern European countries have done. In Greece real wages have fallen by no less than 17% since 2008. In Portugal by 4.5%. In Spain and Italy they fell by about half a percentage point and in Cyprus by 1.4%. Among the Western European countries in recession only in Ireland are real wages higher than they were in 2008 (there they increased until 2009 and declined thereafter).

More / Comments

This is the second part of a two-part post; the first can be read here.

Many contributors to the “Back to Full Employment” blog have pointed out that the current national focus on reducing the debt of the U.S. Federal Government is completely misguided. I thought it might be useful to identify the major arguments raised by the “debt hawks” and to show why, in each case, the arguments are simply wrong.

1. The U.S. national debt at the end of 2012 came to almost 16½ trillion dollars, amounting to more than $50,000 per citizen. Since we will have to pay off that debt, each of us is really $50,000 poorer than we realize.

First of all: there is no need to pay off the national debt. Hardly any country ever pays off all of its national debt, because carrying that debt can cause a problem only if the burden of servicing the debt becomes too onerous. That burden in any given year depends on the relationship between (1) the amount of debt service payments that must be paid out that year by the Federal Government and (2) the size of the national economy that year. The smaller is (1) relative to (2), the easier it is to raise the tax revenues needed to make the debt service payments.

More / Comments

Following the intense debate on the fiscal deficit during the U.S. presidential campaign, fiscal consolidation continues to dominate discussions in policy circles and academia. The large fiscal deficit in the U.S. and sovereign debt woes in the eurozone are used by proponents of the ‘small government’ mantra as a means to advance the belief that fiscal consolidation is the only way to bring the economy back to sustained growth and full employment. While the arguments are not new, the current circumstances of a global recession and a slow recovery in the U.S. make it somehow easier for proponents of this school of thought to fool the public into believing that tying the hands of the government is the only road to salvation.

More / Comments