Robert B. Reich: Why Europe's double dip could lead to one here

Baltimore Sun ^ | May 2, 2012 | Robert B. Reich

[Oldeconomybuyer]

Europe is in recession. Portugal, Italy and Greece are basket cases. The British and Spanish economies have contracted for the last two quarters. It seems highly likely that France and Germany are in a double dip as well.

Why should we care? Because a recession in the world's third-largest economy (Europe) combined with the current slowdown in the world's second-largest (China), spells trouble for the world's largest (that's still us).

Don't blame Europe's problems on its 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 result from excessive debt, so government should cut spending.

In their haste to cut the public debt, Europeans forgot the denominator of the equation. By reducing public spending, they 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. The resulting slowdown is worsening the ratio of Europe's debt to its total GDP.

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.

[TheWriterTX]

We are not in a Recession. We are not in a double-dip Recession. We are in a long-wave contraction. This is a decade long period of historic deleveraging and massive wealth elimination.

The sooner folks accept this, the easier it will be allow the contraction cycle to complete.

The Government keeps trying to kick the can down the road. We have run out of road.

[qam1]

Never happen

To have a double dip, we would have had to left the 1st one, which despite all the media cheerleading we never did

[kabar]

The Left still clings to Keynesian economics. They think we can borrow and spend our way out of this mess. Unfortunately, our huge debt now held at historic low interest rates will help sink any future recovery. Debt servicing costs will skyrocket once the economy really picks up. And both parties refuse to really cut spending. They consider a cut in the rate of increase to be a cut. We are heading off the cliff.

[ILS21R]

“By reducing public spending, they removed a critical source of demand...”

WTH is Reich talking about?

[Fee]

Gov did not run out of road to kick the can down onto. The problem is the can grew into a boulder.

[Dr.Deth]

Reich is a clown and Keynesian mouthpiece. They’re not even waiting for the event before making excuses now.

[Walrus]

The lawn gnome economist speaks: “We can spend our way out of the recession, folks!”

Thank God this man is no longer in government.

[cuban leaf]

Don’t candy coat it. What we are in is WDII.

World Depression Two.

And it has a LONG and accelerating fall still to go.

They are using fuzzy numbers to try to convince the uninformed otherwise.

[cuban leaf]

He’s touching on the gorilla in the room: When the economy is as far gone as it is now, austerity, though a better long term solution than monetizing, creates an economic death spiral.

Also, austerity measures, at this point, is the equivalent of a family being underwater on their house by $400,000 and deciding that rather than walk away, they’ll try to reduce their expenses to pay it off. But dad’s only making minimum wage now.

The family will end up in a cardboard box no matter what they do, but if they DO walk away, the bank will come after them. That is why this will end in WWIII.

[ILS21R]

Thank you. Sorry you had to waste your time for my laziness. I did in fact look it up and found this:

Post-Keynesian economics:

Conversely, some Post-Keynesian economists argue that deficit spending is necessary, either to create the money supply (Chartalism) or to satisfy demand for savings in excess of what can be satisfied by private investment.

Chartalists argue that deficit spending is logically necessary because, in their view, fiat money is created by deficit spending: one cannot collect fiat money in taxes before one has issued it and spent it, and the amount of fiat money in circulation is exactly the government debt – money spent but not collected in taxes. In a quip, “fiat money governments are ‘spend and tax’, not ‘tax and spend’,” – deficit spending comes first. Chartalists argue that nations are fundamentally different from households – governments in a fiat money system can issue liabilities to pay off debt, and thus (assuming they only have debt in their own currency), need not go bankrupt, unlike households, which cannot issue liabilities.

[nathanbedford]

Robert Reich wants both deficit spending and and low interest rates. Those things become incompatible as investors lose confidence in the ability of the government to repay its borrowings because deficits have run on so long that the debt approaches or exceeds GDP.

We have now very nearly reached that point in the US and probably exceeded it in Europe as places like Spain shows symptoms of being unable to roll over its bonds. Meanwhile the United States is monetizing huge percentages of its own debt.

It is not a question of choices for Europe, if a politician can put off austerity and provide the people "plenty" merely by borrowing he will do so. But the Germans at least understand that if they do not impose austerity on places like Greece, but underwrite the debt, the market will not tolerate these excesses.

[cuban leaf]

Usually, when I bring up the “like a family” argument, I actually call out that the difference is that the family can’t just print more money.

And when it is the only option, well, that is where I see the real WWIII scenario. I believe they will HAVE to monetize the debt and those to whom we owe will no be happy. And our perceived miliary weakness will not help. As I said before Obama was president, they will start moving on countries we “protect” like South Korea.

But I’ve noticed, in the vein of “spend and tax”, that they are having a hard time getting the money out there. It’s probably why they want big government. If they hire lots and lots of people and pay them lots of borrowed money, well, that gets it out there. But I’m not seeing that - yet.

[Jim from C-Town]

Reich, like all leftist, particularly those in academia and economics, are just plane stupid. The fact is that Keynesian and ‘ordered’ economies have created nothing but poverty and economic collapse from the beginning of time.

They are morons and should be barred from public life and positions of authority. They should be discussing their ‘theories’ between serving fries and burgers.

[Monty22002]

Have any of those countries actually cut spending? Maybe reduced the rate of growth, but cut?

Especially China? All I’ve heard is how much they are increasing public spending.

So what’s his excuse there? These guys are shameless!

[Jim from C-Town]

Reich, you moron, nobody is buying our debt now! We spend 42% more than we take in at the Federal level now. Of that more than 60% of the bonds to finance that debt are purchased by our own central bank, The Federal Reserve.

That is an unsustainable situation that will destroy our country.

[glennaro]

Agreed. Besides, Munchkins are not to be taken seriously on serious matters.

[ILS21R]

Reich, like all leftist, particularly those in academia and economics, are just plane stupid. The fact is that Keynesian and ‘ordered’ economies have created nothing but poverty and economic collapse from the beginning of time. They are morons and should be barred from public life and positions of authority. They should be discussing their ‘theories’ between serving fries and burgers.

You'll get no argument from me. Economic history discounts Reich's theories.

[Moltke]

Because a recession in the world's third-largest economy (Europe) combined with the current slowdown in the world's second-largest (China), spells trouble for the world's largest (that's still us).

What numbers is he using?

2011 GDP (trillion $) per the CIA World Factbook (via Wikipedia):

EU: 17.72

US: 15.06

China: 6.99

[stephenjohnbanker]

” We are not in a Recession. We are not in a double-dip Recession. We are in a long-wave contraction. This is a decade long period of historic deleveraging and massive wealth elimination.”

MIDDLE CLASS ELIMINATION