The Causes of Economic Crisis

This week's story is Cyprus- another European periphery country in economic crisis, requiring a bailout from the ECB or someone.  Natually this caused my right wingnut email correspondent to fire off a missive about Cyprus's fiscal profligacy and the Doom that awaits the US if we don't solve our deficit problem.



But why did Cyprus's banking industry implode?  Should we blame it on liberal government spending?

No.

OK, I admit it, I knew nothing about Cyprus.  Now I know next-to-nothing about Cyprus.  But I'm reading up online a little.  And the story isn't complicated- it's nearly the same as the Irish story and the Iceland story, with a few twists.  Banking sectors become incredibly large, investing lots of leveraged money poorly (in this case, I guess they invested in Greek government bonds- OOPS!).  In Cyprus, they had lots of money to invest because they were a banking haven where wealthy Russians could go to avoid taxes. (In Ireland and Iceland, the banks attracted investors from Germany and UK especially).  In all three places, the banks were about to go bust, and so the government had to step in, but the numbers were too massive for such small countries to fund the bailouts, so they were screwed.

But where does government incompetence and overspending come in?  Sorry, wingnuts, it doesn't.  Yes, yes, that story plays in Greece, and it plays to a lesser extent in Italy, but not here.  Not in Spain and Ireland, which were running budget surpluses before 2008.

 

When you're a hammer, everything looks like a nail.  For people who have decided that government deficits will be the death of us all, every problem can be explained by deficits if the shoehorn is flexible enough.  But when a country goes in the tank because the banking industry fails, where does the blame actually lie?  With the banking industry!  And with the governments' failure to adequately regulate the industry.  That's the real message.

 

I guess my critics will say I'm just a regulation-guy hammer, so regulation is the answer to everything.  But at least my argument follows a logical progression from problem back to cause.

 

And there's another reason that Cyprus is totally screwed: they don't print their own money, so they can't devalue, they can't increase the money supply, they can't cause inflation to rise.  The European monetary system is controlled by Germany, and is run for the benefit of the German economy and nobody else. 

Macro Economics is Complicated!

Scattergraph- showing the correlation between austerity and
GDP growth- from Krugman's blog

Although my readers who don't share my political philosophy may find this hard to believe, I actually think a lot about how to analyze the economy in a way that's objective and which filters out my confirmation bias.  In one sense this is a futile exercise for anyone who is passionate about politics and has a strong point of view- I'm drawn to arguments that bolster my pre-existing opinions, which is a natural human modus operandi.  But I'm trying.

So one way I try to hold myself intellectually accountable is to make predictions about the future and then see if events bear them out.  I want to try to be ready to change my views if events prove me wrong.

But this game is getting really hard these days, because so much is going on.  We can hang the whole economy on President Obama, and judge "liberal" policies based on how the economy responds to his leadership.  But now we have the Sequester- a clear win for the conservative fiscal hawks.  So I've predicted some economic slowdown because of the Sequester- but from what baseline?  If the economy keeps limping along but not crashing (which is my prediction), do we blame Obama and his liberal policies, or do we blame spending cuts of 2013?  For that matter, do we blame the tax increases that kicked in during January?

 

Now if the economy goes into recession and the bottom really falls out, conservatives will of course blame the president, and liberals will of course blame the austerity policies of the Republicans.  Here I think liberals have a better case- if conservatives are going to crow that they won the latest round of the Budget Wars, which they did, then they really need to own the results.

 

But to be fair, that means that if the economy takes off and has a surprisingly strong period of growth, conservatives get to own that too.  I'll want to crow about Obama's deft handling of things, but that won't really be fair, given that I just said he "lost" the 2013 Budget Battle.

 

So barring some new twist in these wars, I guess I'm saying this: we're testing out austerity budgeting now, in 2013.  Not the severe austerity of the UK or Spain, but relative austerity compared to the policies of 2009-2012.  Keynesian economics says that should mean slowed growth; conservatives say we'll have "expansionary austerity".  Let's see who's right!

You've Gotta Be Kidding Me...

I got this from Kevin Drum today.  A Democratic Senator is mad at the Republicans for continuing to filibuster even after the deal reached early in the year.  Jeff Merkley of Oregon says:

“Senate Republicans have demonstrated that they have absolutely no intention of ending their assault on the ability of the U.S. Senate to function,” Merkley told TPM, saying he had hoped the bipartisan rules change would ease gridlock. “Many of my colleagues are absolutely beside themselves with frustration, and that frustration is rapidly turning to fury.”
 

Now I guess Merkley is one of the Good Guys, who wanted filibuster reform to mean something.  But that any Democratic senator would be surprised that Republicans have continued to filibuster all business, including court nominees, just makes me want to scream.

As I've said before, Republicans are going to immediately change the filibuster rule as soon as they're in control of the Senate.  They're not going to put up with Democrats gumming up their agenda just because it's tradition.  And those oldtimer Democratic senators will howl in fury again; but they'll really have only themselves to blame.  They're just criminally naive.

Obama is a Very Bad Nerd

At President Obama's press conference last week, he said the following:

Now I am outraged that I voted twice for a president who doesn't know the difference between Star Wars and Star Trek.  As everyone knows, the Jedi do a "mind trick"

whereas the "Mind Meld" is done only by Vulcans

I'm just disgusted.

UPDATE: Of course I'm not exactly the first to pick up on this http://www.theatlanticwire.com/entertainment/2013/03/obama-jedi-mind-meld/62672/

The Sequester is Implemented- Small Government Conservatives Rejoice

As predicted, no deal has been reached on the Sequester, and it will now go into effect.  This means that discretionary spending, including the military, will be cut very heavily- there will be furloughs, layoffs, contracts cancelled, and government bureaucracies unable to operate at full capacity.

But one way to look at this is a big win for fiscal conservatives, particularly for those who sneer at Keynesian economics and see the path to prosperity paved only with balanced budgets.  Liberal economists universally note that this will be bad for the economy as a whole in the short term, as it is fundamentally anti-stimulative.

So we have the beginnings of a natural experiment here.  If Freshwater Economists are right, then the recovery should continue apace and even accelerate now that government spending is down so much.  And if Saltwater Economists are right, then this will drag down growth.  Of course there are so many factors in economies, and we'll probably end up somewhere in the middle, but maybe not.  Certainly a big boom in the next year with the Sequester in place would have to make fools of the Keynesians. 

Another point here is who gets the credit/blame for the economy now.  I know the Republicans will continue to try to pin continued slow growth solely on Barack Obama, but fiscally they've just gotten what they want- austerity policies including no tax hikes.  The fact that half those cuts were to the military, which most Republicans don't like, is immaterial in terms of economic growth.  If the US is successfully invaded by a foreign country due to our weakened military, we can blame liberals.  But if unemployment ticks north of its current position in the next year, we need to acknowledge that it's because of conservative fiscal policies.