Krugman:The Urge to Punish
I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates despite soaring unemployment, sliding inflation, and on top of all that the special problems of a monetary union that probably can’t survive unless overall demand is strong. The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is).
This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need? If we’re talking about broader fiscal union or something, what is it about the imminent collapse of the whole system that the Germans supposedly don’t understand? Is there any conceivable way that cutting the repo rate by 50 basis points will somehow undermine actions that would otherwise happen?
What does make sense, maybe, is a two-part explanation. First, the ECB is unwilling to admit that its past policy, especially its past rate hikes, were a mistake. Second — and this goes deeper — I suspect that we’re seeing the old Schumpeter “work of depressions” mentality, the notion that all the suffering going on somehow serves a necessary purpose and that it would be wrong to mitigate that suffering even slightly.
This doctrine has an undeniable emotional appeal to people who are themselves comfortable. It’s also completely crazy given everything we’ve learned about economics these past 80 years. But these are times of madness, dressed in good suits.
June 6, 2012, 9:38 AM
Think of the Children
Every time I hear some smug pundit or politician saying that we can’t spend to create jobs because that would be laying too much of a burden on our children, I get angry — because of reports like this:
For this generation of young people, the future looks bleak. Only one in six is working full time. Three out of five live with their parents or other relatives. A large majority — 73 percent — think they need more education to find a successful career, but only half of those say they will definitely enroll in the next few years.
No, they are not the idle youth of Greece or Spain or Egypt. They are the youth of America, the world’s richest country, who do not have college degrees and aren’t getting them anytime soon.
Everything we know says that this generation will never — never — recover from the terrible job market into which it has graduated. But hey, we can’t do anything about that; we must have austerity, for the sake of the next generation.
June 6, 2012, 9:33 AM
Doing Their Best to Destroy Europe
Martin Wolf is shrill (and rightly so):
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.
Right on cue, the European Central Bank has declined to cut interest rates, or announce any other policies that might help. Because what possible reason might there be to take action?
Oh, and survey data suggest that the euro area economy is really plunging now, plus Spain is on the brink. What about inflation? It’s falling fast — which is a bad thing under the circumstances.
I don’t think there’s any conceivable economic logic for the ECB’s decision. It can only, I think, be understood as some kind of refusal to admit, even implicitly, that past decisions were wrong.
Like Martin Wolf, I’m starting to see how the 1930s happened.