It’s the Great Pumpkin, Angela Merkel!

Spanish ProtestsThere continue to be major protests in Spain—one on Tuesday resulted in clashes with the police, ending in at least 22 arrests and 28 injuries. The people are rightly unhappy about the recent austerity deal. It’s very simple. The Spanish government—like most governments—has debt. Because they don’t have their own currency, potential lenders are concerned that Spain will default on this debt. Thus, interest rates on Spanish government bonds are ridiculously high (almost 7% a couple of months ago). This problem could easily be solved by the European Central Bank (ECB) guaranteeing the Spanish debt. But the ECB will only do this (more or less) in return for $50 billion in austerity—budget cuts and tax increases.

Here’s the reason that the people are angry: Spanish unemployment is almost 25%. These austerity measures will only make things worse. How do we know this? The last three years in Ireland, Italy, Greece, Portugal, United Kingdom, and Spain. Oh, and the United States. And John Maynard Keynes. And the Great Depression. You get the idea.

Austerity from Without!

The German government and the ECB have been pushing an idea that was really stupid 3 years ago but now is just loony: if these troubled economies slash the size of their governments, businesses will magically have “confidence” and start hiring. Paul Krugman has come up with the idea that these people believe in the “Confidence Fairy.” It’s kind of like the Tooth Fairy, but without the evidence to support it. Think: the Great Pumpkin. The Confidence Fairy will rise up out of the periphery giving a booming economy to all good countries.

As with most of economics, there are lots of feedbacks in these policies. Spain has to borrow money to support its debt, but because it doesn’t have its own currency, lender fears of default push up interest rates, and this in turn requires more borrowing. Cutting government spending causes the economy to shrink, the smaller economy provides fewer tax revenues, and this in turn makes more spending cuts necessary. The only way this works is if the Confidence Fairy makes an appearance. But just like in every year’s rerun of It’s the Great Pumpkin, Charlie Brown, she never does.

Moral Hand-Wringing

Here in the United States, most of the coverage on this issue is from the German perspective. It is highly moralistic. It goes like this: GIPSI (Greece, Ireland, Portugal, Spain, and Italy) borrowed too much money during the good times and so now they need to tighten their belts and tough out the recession. (25% unemployment!) The problem is that this is all wrong.

Economics is not a morality play. It doesn’t matter if GIPSI behaved badly before; their bad situation now is hurting everyone. But the fact of the matter is that of those 5 countries, only Greece’s government acted badly. Spain (and others) had a budget surplus going into this recession.

What happened was that banks in Germany (primarily) thought that the EU’s shared currency meant that loans to GIPSI were as safe as loans to Germany or France. When the recession hit and these countries had trouble paying their loans, the German bankers freaked out. Now, we’re supposed to wag a finger in the faces of GIPSI: “You shouldn’t have taken out those loans!” But somehow everyone seems to forget that it is the bankers and not the borrowers who are supposed to police the loans.

Rick Santelli and Moral Outrage

We’ve seen this same kind of thinking here in America. Rick Santelli famously started the Tea Party movement with his rant about how good people like him were being forced to pay for the bad loans other people took out. Even apart from all we know about predatory lending, this is a ridiculous contention. Parents know that if they allow it, their children will eat cookies to the point of illness. Similarly, bankers know that people want to borrow more than they can afford. Or at least they should know this.

Whether it is the Tea Party or the German government, there is no place for moralizing when cleaning up an economic mess. But of course, this idea worked half way. There was no moralizing about saving the banks. In fact, after saving them, nothing was done to stop them having to be saved in the future. But when it came to saving homes and jobs, well, those people got what they deserved.

The people in Spain are fighting back. I wish them well.

¡Viva España!


Democracy Now! has a good story about what’s going on in Spain from the people’s perspective. It contains some interesting reporting like the fact that after foreclosure and eviction, people are still held responsible for their loans. Wow.

Update (26 September 2012 9:24 pm)

If you look on Google News, you will see that almost all of the coverage of this story is about how it is affecting the stock market. Pathetic. The AP has a good piece, Spain counts cost of anti-austerity protest, that gives an overview of what is happening. Note: its claim that 26 of the injured were police is almost certainly propaganda. Of the 28 initially listed in the CNN report, only two were police.

Update (27 September 2012 7:01 pm)

Paul Krugman wrote about all this in today’s New York Times. It is worth reading the whole article, but I was struck by this:

Much commentary suggests that the citizens of Spain and Greece are just delaying the inevitable, protesting against sacrifices that must, in fact, be made. But the truth is that the protesters are right. More austerity serves no useful purpose; the truly irrational players here are the allegedly serious politicians and officials demanding ever more pain.

He concludes:

Beyond that, a significant part of public opinion in Europe’s core—above all, in Germany—is deeply committed to a false view of the situation. Talk to German officials and they will portray the euro crisis as a morality play, a tale of countries that lived high and now face the inevitable reckoning. Never mind the fact that this isn’t at all what happened—and the equally inconvenient fact that German banks played a large role in inflating Spain’s housing bubble. Sin and its consequences is their story, and they’re sticking to it.

Worse yet, this is also what many German voters believe, largely because it’s what politicians have told them. And fear of a backlash from voters who believe, wrongly, that they’re being put on the hook for the consequences of southern European irresponsibility leaves German politicians unwilling to approve essential emergency lending to Spain and other troubled nations unless the borrowers are punished first.

Of course, that’s not the way these demands are portrayed. But that’s what it really comes down to. And it’s long past time to put an end to this cruel nonsense.

If Germany really wants to save the euro, it should let the European Central Bank do what’s necessary to rescue the debtor nations—and it should do so without demanding more pointless pain.

You can see in these comments the danger of past German government demagoguery: now that the government may want to fix the situation, it feels constrained by the Frankenstein’s Monster that it’s created in the people.

Theodore Roosevelt on Inequality 1910

Theodore RooseveltThe true friend of property, the true conservative, is he who insists that property shall be the servant and not the master of the commonwealth; who insists that the creature of man’s making shall be the servant and not the master of the man who made it. The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being… The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power.    —Theodore Roosevelt, “Square Deal” speech (1910) [Quoted from Winner-Take-All Politics]

A Feather in Scott Brown’s Cap

Racist Image of Elizabeth WarrenAfter seeing some of the debate Thursday night between Massachusetts Senator Scott Brown and Elizabeth Warren, I was angry. Brown said something that was so racist, I was stunned. He wasn’t claiming to have special insight into Warren’s family history when he claimed, “She checked the box claiming she’s a Native American, and clearly she’s not.” Instead, he was saying, “Clearly she’s white!”

This gave me an idea for a poster: a picture Elizabeth Warren in a Cherokee headdress with a caption that read, “Satisfied Scott?” I thought that got to the heart of Brown’s thinking. He seems to be saying that he knows what a Native American looks like because he’s seen lots of westerns.[1] But brilliant as I thought my poster idea was, I was afraid that people might take it the other way. They might think that I was implying, like Brown, that it was ridiculous to claim that Warren was part Native American.

So I did a Google image search of “Elizabeth Warren Indian.” And I found tons of images like the one on the left. None that I have found are making the point that I was trying to make. Instead, they are examples of what I was trying to spoof.

Yesterday, a Scott Brown staff member and other supporters were caught on video doing “tomahawk chops and war whoops” outside a Brown campaign event. Brown said that he didn’t condone these actions, but he said he wouldn’t apologize because it is Warren who should apologize for claiming to be 1/32 Native American.

This isn’t about the substance of Brown’s claim that Warren got an unfair advantage in her academic career by using this heritage. I don’t think anyone can take this seriously. Warren is a brilliant attorney and that’s why she has reached her position in academia and politics. But Brown can try to make that case.

What comes across is that Brown and his supporters are at best insensitive to our national history of genocide and theft from native peoples. It is horrible and it reeks of desperation.

[1] Strangely, he’s never seen movies like A Man Called Horse where the definition of a tribe member is a little more complicated than that.