Governmental Austerity Does NOT Work In Times Like These

Paul Krugman Calls it:  The Austerity Debacle  And he is right AGAIN! Unfortunately Politics and ideology trump basic economics and common sense.

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

….. PAUL KRUGMAN 1/29/12

Spain’s Difficult Task Ahead May Prove TOO Difficult

MADRID (Reuters) – Spain’s new government will push ahead within weeks on labor reform aimed at tackling the European Union’s highest unemployment rate after unions and employers failed to meet a deadline for agreeing how to modernize a rigid system that harms them both.

It is difficult to see how the reforms can help Spain’s immediate battle with a chronically-weak economy and a jobless rate that has soared to 23.5 percent in recent months, leaving some 5.4 million out of work.

But Prime Minister Mariano Rajoy drove home the need for action by releasing the latest unemployment figures two weeks early this week and says he will do what is needed to loosen up the system and enable freer job creation.

To do so the government will have to take aggressive measures to worsen wages and conditions for employees that unions warn could prompt a national strike. From what signs the government has given on the shape of the reform, on the other hand, economists say it may also fail to please employers and risks not doing enough to generate meaningful improvement.

In a speech in Malaga on Saturday, Rajoy called the headline unemployment number – equivalent to almost one in four of the economically active population – “astronomical” and said his government would “wage war” on unemployment lines.

“This is in keeping with the change of government,” Santiago Sanchez, chief economist at Juan Carlos III university in Madrid, said.

“The previous government looked for positive statistics to highlight its management (of the economy) .. and this one is rooting out the worst ones to justify its tough austerity measures.”

Elected in a landslide in November, Rajoy gave worker and employer representatives until last Friday to agree on a broad sweep of reforms as he tried to draw a line under some 18 months of largely fruitless talks. They missed the deadline.

The government also faces credit agency pressure, with Standard & Poor’s warning it could cut Spain further this year or next following Friday’s two-notch downgrade if reforms were delayed or “insufficient to reduce the high unemployment rate.”

‘GOLDEN OPPORTUNITY’

Job creation in Spain has been crippled by a stagnant economy, a tough austerity program and exceptionally generous redundancy deals. Critics say the labor market is shackled by complex and rigid agreements on collective bargaining, statutory redundancy payments and temporary contracts.

“The (labor) reform has to be thought of as a golden opportunity to change the structure of the way the Spanish labor market operates and to be a major force for higher productivity and to reduce structural unemployment,” Antonio Garcia Pascual, chief southern European economist at Barclays in London, said.

Unemployment rates were likely to rise further given Spain’s economy was set to shrink this year, he said, but reforms making it easier and cheaper for companies to hire and fire as well as giving more workers better protection would promote jobs growth once the upturn comes.

Terms and conditions for Spanish workers tend to be agreed at regional level and sometimes across industries, giving unions strong negotiating powers that they will battle to protect.

But generous permanent contracts mean firms are more inclined to hire workers on temporary ones that offer little protection.

“Collective bargaining .., is something we are particularly sensitive about,” said a spokesman for the country’s biggest union, the blue-collar CCOO, warning that major changes could provoke a general strike.

Garcia Pascual said the government could “probably” live with that. “I suspect that with 23 percent unemployment the response (to a strike call) may not be so enthusiastic.”

Gilles Moec, analyst at Deutsche Bank in London, said he expected the new laws to give firms greater freedom to opt out of collective contracts. “My understanding is that the government is ready to go there,” he said.

The government will also scale back redundancy payments for permanent staff that are among the highest in the world, favoring contracts offering a statutory minimum of 33 days’ pay for each year worked, Treasury Minister Cristobal Montoro said.

Unions are demanding 45 days’ pay and employers 20, but even the lower figure dwarfs payoffs in other countries.

In Germany, at least half a month’s pay is usual and in France a fifth, while in the United States there is no statutory requirement to award severance pay.

The heavy extra potential burden on employers in Spain means many are prepared to offer only temporary contracts that give workers little if any protection against dismissal.

A SINGLE CONTRACT

According to the national statistics institute, 26 percent of all Spanish employment contracts were temporary as of last September, and the proportion has almost certainly risen since.

For Barclays’ Garcia Pascual, the labor market will not revive until that trend is reversed.

“I think they should be bold and think about a single contract where the firing cost increases with seniority. (But) that is not easy to sell to unions or employers.”

“The best way forward would be to reduce the level of protection on permanent contracts and improve (it) …on temporary ones,” added Deutsche Bank’s Moec.

The labor reform draft is expected to be ready by early February and Treasury Minister Cristobal Montoro said it would be pushed through without a broader consensus if necessary.

The government would however “keep lines of communication open” with unions and employers in the run-up to the new legislation, a labor ministry spokeswoman said.

While angering unions, more flexibility would please domestic employers and would-be foreign investors.

“What most people want is more flexibility and collective bargaining agreements” tailored to individual companies and sectors, said U.S. ambassador Alan Solomont.

He cited the U.S. practice of linking work hours to productivity cycles, for instance in auto plants. General Motors Co operates a large assembly line in Zaragoza.

The strategy also worked well during the 2008/9 economic crisis for Germany, where unemployment fell in December to its lowest level since the country’s reunification two decades ago.