Is Modest Growth vs. Full Employment a False Dichotomy?

As Summer slid into Autumn in 2012, the Chinese government was giving no hint of any ensuing economic stimulus program. This was more than slightly unnerving for some, as a recent manufacturing survey had slumped more than expected, to 49.2 in August. A score of 50 separated expansion from contraction. A similar survey, by HSBC, came in at 47.6, down from 49.3 the previous month. Bloomberg suggested that China might face a recession in the third quarter. So why no stimulus announcement?  Was the Chinese government really just one giant tease? I submit that the false dichotomy of moderate economic growth and full employment was in play. In short, the Chinese government did not want to over-heat even a stagnant economy even though the assumption was that full employment would thus not be realizable.

The full essay is at "Economic Growth and Full Employment in China." 

The Spanish Recovery: On the Roles of Budget Constraints and Exports

In 2007, the E.U. state of Spain “was hopelessly addicted to a credit-fueled construction boom that produced a shattering bust, leaving banks collapsing in the face of bad loans.”[1] A decade later, the state’s economy was “expanding at around 3 percent” over the previous year, “producing goods for export, generating jobs,” and pointing to possible E.U.-wide economic recovery.[2] The Spanish economy had returned to its pre-crisis size, according to the state’s government, yet the economy had not yet solidified a firm foundation and unemployment was still stubbornly high.

The full essay is at "The Spanish Recovery."

See Related: Essays on the E.U. Political Economy, which is available in print and as an ebook at Amazon. 

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1. Peter S. Goodman, “Spain’s Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.

2. Ibid.

Should Germany Prop Up the E.U.'s Southern States?

In April 2013, Deutsche Welle reported that the German central bank had “analyzed possible effect a domestic growth package could have on southern European economies. ‘By and large, it would have no impact,’ claimed Clemens Fuest, president of the Mannheim-based Center for European Economic Research. ‘We won't be able to fight recession in southern Europe with domestic growth incentives.’ He added that southern European states do not just have a demand problem. ‘Prices there have got out of hand,’ he said. ‘Wages and labor costs have spiraled out of control, and must be brought down again. If you were to implement a growth scheme, you'd only slow down the necessary adjustments.’”

The full essay is at Essays on the E.U. Political Economy: Federalism and the Debt Crisis, available at Amazon.

Bailouts Without Stimulus: E.U. Policy on Spanish Banks

Directly and indirectly, the housing bust that began in 2007 put “the bailout” on the map in the lexicon of industrial policy both in Europe and North America. Whereas in the U.S., few restrictions were placed on the recipients, the E.U.’s first €37 billion ($47.9 billion) for Spain’s banking sector required the four major state banks “to make sharp cuts in their balance sheets and payrolls,” according to the Wall Street Journal. Bankia, the largest of the banks to be bailed out, planned to cut its number of employees by more than 6,000, close more than 1,000 branches, pass on any further real-estate lending, and reduce its assets by €50 billion as the bank focuses on retail banking—getting back to the knitting, as it were. Presumably the bankers were not allowed to grant themselves bonuses as a condition of the bailout. If so, it would differ appreciably from the U.S. bailout of Wall Street banks.

The full essay is at Essays on the E.U. Political Economy, available at Amazon.

The Federal Reserve on Full Employment: A Democracy Deficit?

The American economy expanded during the second quarter of 2012 at an annualized rate of 1.7 percent. Meanwhile, the unemployment rate for all of the American states combined was expected to remain above 8 percent. In this context, the chairman of the Federal Reserve, Ben Bernanke, remarked, “It is important to achieve further progress, particularly in the labor market.” In other words, the free market cannot be relied on to reach full employment. More is needed. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, the central bank would enact a pro-employment policy. From the standpoint of democracy, the choice of the Fed to engage in such a policy is a double-edged sword.

                                                                                                   Fed Chairman Bernanke.                    Reuters
 

On the one hand, Bernanke was able to defy political pressure from Republicans to refrain from such a measure. Sen. Charles Schumer (D-NY) said that the Fed chief “should not let any political backlash deter him from following through and doing the right thing.” At the very least, short-term political pressures oriented to an upcoming election should not be allowed to thwart more long-term policy oriented to full employment.
 

On the other hand, from the standpoint of democratic legitimacy, a policy enacted by a body that is buffered from elected representatives can be problematic. Ironically, it was Bernanke who had urged Henry Paulson of the U.S. Treasury to appeal to Congress to pass the bank bailout (TARP) because only such passage could have democratic legitimacy. Accordingly, Sen. Bob Corker (R-TN) had this to say of Bernanke’s musings on a pro-employment policy from the central bank. “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy.” The senator could have cited the U.S. constitutional convention, whose delegates had vested the U.S. House of Representatives with the sole power to initiate spending (i.e., the power of the purse). It is particularly dangerous for a body insulated from political pressure to engage in economic stimulus if that body has the unlimited power to create money. At the very least, inflation could ensue from too much stimulating; and yet, it should not be supposed that the market itself can reach full employment.
 

It may be that the constitutional design of American federalism wherein the various checks and balances on the federal level operate in effect to “push” policy down to the republic or state level. Employment policy from the Federal Reserve could simply be the point of least resistance. In other words, the central bank may be the only option short of the state governments when the Congress and the U.S. president are at logger-heads. The cost is not simply in terms of democratic legitimacy, for the American founders made federal legislation difficult to enact in part so the federal government would not encroach on the powers reserved to the member states. In other words, action by the Fed may take the pressure off the federal elected representatives, but at the expense of federalism (i.e., the state governments being able to check the federal government). To be sure, full employment is a worthy objective, but the “how” and “by whom” are also worthy of consideration.
 

Source:

Binyamin Appelbaum, “Fed Chairman Makes Case, in Strong Terms, for New Action,” The New York Times, August 31, 2012. http://www.nytimes.com/2012/09/01/business/economy/fed-chairman-pushes-hard-for-new-steps-to-spur-growth.html?_r=1&hp

 

Greek Austerity Win at E.U.’s Loss?

According to one director of a public-debt consulting firm in the E.U., “In the realm of investor perceptions, Spain has crossed the Rubicon from solvency to insolvency.” A day after Europeans in the state of Greece had given a narrow victory to parties in favor of maintaining the austerity program there, investors’ concern regarding the viability of the euro pushed the yield on Spanish 10-year bonds as high as 7.2 percent—a level that Spain’s economy minister, Luis de Guindos, claimed is unsustainable in the long term.

The full essay is in Essays on the E.U. Political Economy, available at Amazon.

Anti-Austerity in Greek Government

The Socialists and then the New Democracy Party told Greeks that sacrifices were necessary to avert default on the state’s debt. This position came at a high political cost on May 6, 2012, when both parties lost seats in the state’s legislative election. “The established parties collapsed — they had too much pressure from Berlin and Brussels and the I.M.F.,” said Nikos Xydakis, an newspaper editor and a political commentator, referring to Greece’s foreign lenders.[1] In other words, the leaders of the two mainstream Greek parties sold out their compatriots, having caved in to ultimatums from Merkel operating at the E.U. level. “In a meeting with President Karolos Papoulias, the leader of the leftist party, Alexis Tsipras, ridiculed the leaders of the two main parties whose coalition lost its majority in the parliamentary elections.”[2] Tsipras added that his party would not be forming a government with either party. The New Democracy Party had been unable to form a government in the wake of the election, so it was then Tsipras’ turn to try.

  

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Rachel Donadio and Niki Kitsantonis, “Greek Leftists Rule Out Coalition with Incumbents,” The New York Times, May 8, 2012.
2. Ibid.

Merkel’s Fiscal Box in the E.U. Debt Crisis

Germany was ruling out any substantive shift in its approach to Europe's debt crisis despite a rising chorus of opposition to Berlin's austerity policies that reached a crescendo in the elections in Greece and France on May 6, 2012. On the following day, Merkel “rejected the notion that Europe was on the brink of a major policy shift after Socialist Francois Hollande defeated her fellow conservative Nicolas Sarkozy and Greek voters punished ruling parties who slashed spending to secure a foreign bailout. . . . Merkel herself made clear that, while there was scope to discuss tactics, the overall strategy EU leaders committed to by agreeing a compact on fiscal consolidation was ‘not negotiable.’”[1] That seems a bit presumptuous, considering that the “fiscal pact” had yet to be ratified in enough of the states to go into effect.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

1. Noah Barkin and Stephen Brown, “Germany Austerity Policies: Berlin Unmoved by Votes in France, Germany,” The Huffington Post, May 7, 2012.