Ben E. King, Bertrand Russel, Keynes and the classical German austerians

 

Dreams are odd.  I woke up this with the dimmest recollection of a vision of a dingy roadside bar at night with a single lamp, a closed door and something a little frightening outside; inside there was an old jukebox dropping a 45 onto the turntable, and from the jukebox came a crackly recording of Ben E. King singing “Stand By Me”.  Ok, it’s a great song.  But why?  Something else was there underneath.  There had to be.  My dreams in the last few years have generally been a lot darker than that.  What are the words to that song?  The song is upbeat, uplifting…well, wait.  Skies are crumbling in that song.  Aren’t they?  Yeah.  And mountains are being washed to the sea.  So there is some darkness.   And the theme in the background was a bit of Bertrand Russel that Craig (my brother in law) had once sent to me.

It took me hours of puzzling to unravel it, to get back to where that all came from.  It was the title of this post backwards.  You don’t believe me?  I’ll go through it.

First the austerians: Guido Westerwelle, the German Foreign Minister, wrote an op-ed column in the Washington Post yesterday.  I read through the whole thing, but the truth is that my heart wasn’t really in it after I got past the paragraphs saying that the solution to the depressions created by austerity was more austerity, long, patient, enduring austerity until morale improves.  He’s sympathetic with the poor unemployed youth of Spain, but…well, here are his words:

“The real causes of the economic crisis are the massive debts incurred over many years and the lack of competitiveness in certain countries. The consistent, long-term continuation of budget consolidation is an indispensable precondition for recovery. The Group of Eight leaders subscribed to this approach last weekend when they committed to “sustainable fiscal consolidation policies.” That is why the European Union’s fiscal compact — the agreement to keep deficits in Europe permanently under control — must not be renegotiated now…

The countries caught in crisis have already decided to make important reforms. We have great respect for the difficulties faced by many in those nations. But given how considerably some countries’ economies have shrunk and the alarmingly high unemployment rates among youth, the reforms that have been launched are the only chance for getting back on track to sustainable growth. Patience is needed: It will be a while until the reforms take effect. But the experience in Germany, Poland and the Baltic states indicates that they will succeed.”

Patience is needed…yes.  Long, hard patience, I thought.  And it’s true; in the long run, the long long run, all will be well again, as I’ve said before in this blog.  In the course of a long recession debts are reduced by bankruptcies, by economizing on household investments of all kinds from washing machines to college educations, and once those household obligations have been eliminated over the terrible years required to do that, the members of the households are free to work at much lower wages.  Banks fail because they bet on prosperity and got depression instead; businesses fail because there is no demand for their product.   But in the end when the deflation has completed its destruction the “ocean is flat again”.   And then, it's true, new businesses will grow, and new banks will be established.  Nothing lasts forever, good or bad.

The “ocean is flat”---that’s Keynes, the next link in the chain.   Westerwelle is telling us that in the long run it will work out.  But one of Keynes’s most famous quotes was this: “The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”

In the long run, I thought, global warming will turn the planet into a wasteland, but you needn’t worry about it: when, through hunger, war and desease, the human population of the earth has been reduced enough so that the earth can heal itself, the tiny remaining human economy will have plenty of room to grow for a while.  Of course in the longer run the earth will boil away as the exploding sun expands past Earth’s orbit and devours us all. In the longer run the universe will become a thin molecular mist and then, yes, then all will be peaceful again.  From Bertrand Russell (next link in the title’s backward chain):

“That Man is the product of causes which had no prevision of the end they were achieving; that his origin, his growth, his hopes and fears, his loves and his beliefs, are but the outcome of accidental collocations of atoms; that no fire, no heroism, no intensity of thought and feeling, can preserve an individual life beyond the grave; that all the labours of the ages, all the devotion, all the inspiration, all the noonday brightness of human genius, are destined to extinction in the vast death of the solar system, and that the whole temple of Man's achievement must inevitably be buried beneath the debris of a universe in ruins--all these things, if not quite beyond dispute, are yet so nearly certain, that no philosophy which rejects them can hope to stand. Only within the scaffolding of these truths, only on the firm foundation of unyielding despair, can the soul's habitation henceforth be safely built.”

That, I thought, is what Westerwelle is telling us.  Only on the foundation of unyielding despair can Europe’s economic redemption be built.

Well, on the foundation of Spanish despair, and Portuguese despair, and Greek despair.  I worry about unemployment in this country, I worry about my own children, but in Spain unemployment among the young is 50%.  A whole generation of Spanish young people are falling behind in every part of life, and the statistics I’ve heard say that most young people who start life in a recession, whether here or in Spain or in Portugal or Greece, will never regain the time or the income they are losing now.  Westerwelle has “great respect for the difficulties faced by many in those nations”---at a distance.  Unemployment in Germany is down near 7%.  Germany’s doing fine.

But what about his argument that Germany’s experience in the last decade is proof that austerity works? The view promoted by Westerwelle, and by conservatives here, is that these countries were fiscally profligate, or that they had massively generous social service budgets that had to be “reformed”---by which they mean cut.  Westerwelle’s column, cited above, claims that “the real causes of the economic crisis are the massive debts incurred over many years”.

But that’s nothing like true.  Germany’s public social spending was about as big as Italy’s in 2007, before the current problems, and was far higher than Spain’s, Portugal’s, or Greece’s.  And while Germany did run a smaller deficit than Italy and much smaller than Greece in the decade before the crisis, over those same years Portugal ran a smaller deficit than Germany as a percent of its GDP, and Spain, on average over those years, had a budget surplus.  

It should be clear by now that I’m skeptical of that view of how Germany turned around.  I’ll make this brief, since this is a long post already.  Here’s my guess, and it matches the guesses of many others---I don’t doubt that I came to it by reading those others, but it makes sense.  Early in the lifetime of the Euro capital flowed south, into countries like Spain, Portugal and Italy.  Prices rose in those countries compared to the prices in Germany, and as a result German goods looked cheaper by comparison.  But, you would ask, wouldn’t low prices mean that German exports would grow, and their payment balances would be strongly in their favor, strongly stimulative to the German economy?  Well, yes.  And that’s just what happened.  And exactly the opposite happened in Greece, Italy, Portugal and Spain (sometimes called the GIPS).  Paul Krugman has had several blog posts about this, like this one, which has a great graph that shows exactly this phenomenon.  Here’s the graph from Krugman’s blog:

My own view of what has happened in the last decade is that prices rose in the GIPS, which induced a large current account surplus in Germany, boosting their economy.  Now that the reverse must take place---rising prices in Germany to boost the economies of the GIPS---Germany will simply not allow it.  Inflation, even modest levels of inflation, is not acceptable in Germany, in their view.  But that is exactly what must happen to solve this problem without breaking up the Euro.  Germany’s prices must rise or Spain’s must fall, and that is a much, much harder process to endure.  Still, Germans would much rather watch Greece and Portugal struggle, watch investments in the GIPS dwindle and businesses collapse, watch the young in Spain lose all the opportunities for growth that should take place in their early years, than permit even modest inflation at home.

And that brings us to the last link in the title, the link to Ben E. King.  It’s not really fair to Mr. King, or to his meaning when he sang the words, but groggy connections made in dreams are not always fair.

I have a vision of Guido Westerwelle and Angela Merkel and the leaders of the European Central Bank standing together, steadfast against all critics, calling to each other: stand by me, stand by me!  They call.  If the sky in Spain should crumble and fall, and their mountains should wash to the sea, I won’t  cry, they tell each other;  I won’t cry, I won't cry, no I won’t shed a tear, just as long as you stand by me.