Europe is in recession.
Britain's Office for National Statistics confirmed today (Wednesday) that in the first quarter of this year Britain's economy shrank .2 percent, after having contracted .3 percent in the fourth quarter of 2011. (Officially, two quarters of shrinkage make a recession). On Monday Spain officially fell into recession, for the second time in three years. Portugal, Italy, and Greece are already basket cases. It seems highly likely France and Germany are also contracting.
Why should we care? Because a recession in the world's third-largest economy, combined with the current slowdown in the world's second-largest (China), spells trouble for the world's largest.
Remember -- it's a global economy. Money moves across borders at the speed of an electronic impulse. Wall Street banks are enmeshed into a global capital network extending from Frankfurt to Beijing. That means that notwithstanding their efforts to dress up balance sheets, the biggest U.S. banks are more fragile than they've been at any time since 2007.
Meanwhile, goods and services slosh across the globe. If there's not enough demand for them coming from the second and third-largest economies in the world, demand in the U.S. can't possibly make up the difference. That could mean higher unemployment here as well as elsewhere.
What's the problem with Europe? Don't blame it on the so-called "debt crisis." There was no debt crisis in Britain, for example, which is now experiencing its first double-dip recession since the 1970s.
Blame it on austerity economics -- the bizarre view that economic slowdowns are the products of excessive debt, so government should cut spending. Germany's insistence on cutting public budgets has led Europe into a recession swamp.
German Chancellor Angela Merkel, who has led the austerity charge, and other European policy makers who have followed her, have forgotten two critical lessons.
First, that the real issue isn't debt per se but the ratio of the debt to the size of the economy.
In their haste to cut the public debt, Europeans have overlooked the denominator of the equation. By reducing public budgets they've removed a critical source of demand -- at a time when consumers and the private sector are still in the gravitational pull of the Great Recession and can't make up the difference. The obvious result is a massive slowdown that has worsened the ratio of Europe's debt to its total GDP, and is plunging the continent into recession.
A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it's infinitely better than a smaller debt on top of a contracting economy.
The second lesson Merkel and others have overlooked is that the social costs of austerity economics can be huge. It's one thing to cut a government budget when unemployment is low and wages are rising. But if you cut spending during a time of high unemployment and stagnant or declining wages, you're not only causing unemployment to rise even further -- you're also removing the public services and safety nets people depend on, especially when times are tough.
And with high social costs comes political upheaval. On Monday, Netherlands Prime Minister Mark Rutte was forced to resign. U.K. Prime Minister David Cameron is on the ropes. The upcoming election in France is now a tossup -- incumbent Nicolas Sarkozy might well be unseated by Francois Hollande, a Socialist. European fringe parties on the left and the right are gaining ground. Across Europe, record numbers of young people are unemployed -- including many recent college graduates -- and their anger and frustration is adding to the upheaval.
Social and political instability is itself a drag on growth, generating even more uncertainty about the future.
What European policy makers should do is set a target for growth and unemployment -- and continue to increase government spending until those targets are met. Only then should they adopt austerity.
What are the chances that Merkel et al will see the light before Europe plunges into an even deeper recession? Approximately zero.
The danger here for the United States is clear, but there's also a clear lesson. Republicans have become the U.S. party of Angela Merkel, demanding and getting spending cuts at the worst possible time -- and ignoring the economic and social consequences.
Even if the U.S. economy (as well as President Obama's reelection campaign) survives the global slowdown, we're heading for a big dose of austerity economics next January -- when drastic spending cuts are scheduled to kick in, as well as tax increases on the middle class. But the U.S. economy isn't nearly healthy enough to bear this burden.
If nothing is done to reverse course in the interim, we'll be following Europe into a double dip.
Robert Reich, Chancellor's Professor of Public Policy at Berkeley and former
Secretary of Labor, is the author of Beyond Outrage. His widely-read blog can be found at www.robertreich.org.
Follow Robert Reich on Twitter: www.twitter.com/RBReich
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From Wiki: Milton Friedman considered Ludwig Mises (the founder of the Austrian School) inflexible in his thinking:
The story I remember best happened at the initial Mont Pelerin meeting when he got up and said, "You're all a bunch of socialists."
We were discussing the distribution of income, and whether you should have progressive income taxes. Some of the people there were expressing the view that there could be a justification for it.
Another occasion which is equally telling: Fritz Machlup was a student of Mises's, one of his most faithful disciples. At one of the Mont Pelerin meetings, Machlup gave a talk in which I think he questioned the idea of a gold standard; he came out in favor of floating exchange rates. Mises was so mad he wouldn't speak to Machlup for three years. Some people had to come around and bring them together again. It's hard to understand; you can get some understanding of it by taking into account how people like Mises were persecuted in their lives.[23]
The drop will be higher than the cut in spending - a 10% boost does not come undone with a 10% cut.
This is one of the lies that every politician knows but is unwilling to admit or tell the American people. The reason every bit of spending is essential and why they cannot cut anything at all substantial is they all know (both parties) that the GDP would go off the cliff if they actually "balanced" the budget. This would mean no more re-election.
Since they are most worried about keeping their jobs they will say and do anything to prevent the spending from stopping. Unfortunately math does not care about what they want. Eventually the cuts will happen regardless of who is in office when the spigot dries up. It is not guaranteed that the bond buddies will always be there to purchase debt. When that gets cut off then the cuts will be forced. It is much better to actually have a plan of action rather than wait until a panic. But we all know nothing gets done without a panic situation.
There is no moral code - either politicians solve the issue or it will be "fixed" for us. "Fixed" means a complete breakdown of the financial system when the govt is unable to issue bonds. Even now, if rates were to raise to historical norms of 5-6% the govt is totally screwed.
What sounds good, what seems nice or what is thought of as fair has no meaning now. Unfortunately most of the social services will get cut. As will the military and other stuff. There is no choice. Tax increases cannot fix the problem without significant cuts. Had the politicians of the last 40 years made different decisions (all of them) perhaps we would be in a different situation.
We can either be proactive and choose the fix or the fix will be thrust upon us very, very quickly and we will have no choice.
Robert, get out of Ramey's classroom and get a real education.
The Republicans will be making the hard necessary choices in Jan 2013 ! Some body has to act like a grown up and take the charge card away from the children! Tough Love !
The western regional capital of Greater Germany ( presently known as Paris ) is very pleasant in the summer.
Stupid Germans.
But that is what Reagans team said?
I am going outside now to see all the pigs take flight!
They will not heed the tale of the "austerity trap," emanating from Europe, they will double down on their quasi religious conviction called CONSERVATISM - and go after S.S. and Medicare and as for the future of the U.S.A. as we know it; all bets will be off...
So we get trapped in a viscous circle: we put money into the system to drive commerce, but it comes with debt, so we struggle to pay the debt, which depresses commerce, and back to stage 1 around and around. And the only thing that grows is the debt, because we can never pay it all back.
A few clever bankers get rich while providing nothing of use, a few other very clever, hard working, and lucky people earn their riches mainly because they were the right person in the right place at the right time, but for the rest of us, we are mostly also very hard working but we struggle to merely survive. Get rid of the debt based monetary system that rule the planet and things would be a million times better.
How do you propose that we get rid of a debt-based monetary system?