There 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!

Afterword

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:

He concludes:

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.

After 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.

I’m been thinking very hard (You know: frown, furrowed brow.) about this question of double taxation. The idea is that capital gains taxes should be lower because the money has already been taxed at the corporate level. I know that Paul Krugman accepts this, but I can’t find the article. I still haven’t figured it out.

But Dean Baker notes something amazing about Mitt Romney’s taxes. On the 60 Minutes interview, Romney did something really deceptive. When asked if it was fair that regular workers pay a higher tax rate than he does on his capital gains, Romney replied, “It is a low rate. And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as thirty-five percent.”

That gets us to my question about whether this whole idea of “double taxation” is valid. Dean Baker, however, notes that this question doesn’t even apply to Mitt Romney:

To be fair, Romney never said that his income was taxed on the corporate level. But there is no other way one could reasonably take his statement. Regardless, Romney should be asked the question again. “Given that your income is not taxed at the corporate level, do you think it is fair that regular workers pay a higher tax rate?”

My guess is that this will lead to lots of equivocating about “job creators” and the “free market.” And maybe we’ll be treated to more information about how much he tithes to the church. That counts as a tax, right?

A few years back, Romney explained why productivity increases, although painful, are good.

This is simple stuff. He gives a hypothetical: a country with 200 people in it. Half of them farm and half of them build houses. Someone invents the plow and suddenly, all the country’s food needs can be met with only 50 people. Now, 50 former farmers are out of work.

Romney explains that this is good because those 50 people can then produce something else that is good for the country:

This is true, of course. In fact, this is kind of like Economics for Preschoolers.

The problem I have with this example is that it wouldn’t work the way Romney claims. The invention would not cause half the people to be unemployed. At first, they would just grow more food than they needed. Eventually, everyone (Including the builders!) would work less. This greater leisure would lead to people building chairs, making movies, whatever.

The point is that there would be no disruption. In a truly free society, an unemployed farmer would just start working some fallow bit of land. In our society, he couldn’t because that fallow bit of land is owned by someone else. Maybe the farmer could make a deal with the owner and maybe he couldn’t. But that is our modern problem, not the problem of a true free country.

I’m not suggesting that we abolish land ownership. However, I am suggesting that for the right of private property, society should be able to demand something from land owners to ameliorate the disruptions caused to workers.

The problem I see in modern conservatism is that private property is seen as something natural. Most of these people live in a fantasy land where if there were no government the world would turn into a libertarian utopia instead of the dog-eat-dog, roving biker gang dystopia of Mel Gibson fame. The old conservative saying is, “Rights imply responsibilities.” Somehow, they just can’t see the second word in “property rights.”

Last night, I watched O Brother, Where Art Thou? for the first time in many years.It is a perfect film, and likely the Coen Brothers’ best.

It is based upon The Odyssey, but the word is that the Coens have to this day never read it. This is not surprising, because O Brother follows the book in only the most vague way other than throwing in well known parts like the Cyclops. This is for the best. I’m not that fond of The Odyssey. To me it is unrelentingly negative and unless you really like Odysseus (I don’t) the fact that all of his crew die is a major bummer.

In O Brother, the Coen Brothers take this endless romantic struggle and turn it into a goofball comedy. The most striking change is of the Odysseus character: Ulysses Everett McGill. Whereas Odysseus only seems to be interested in getting home at times of pique, McGill is always focused on getting home and saving his marriage.

Despite moving the story from ancient Greece to Great Depression America, the film maintains the other worldly aspects of the book. The best part of this is having Satan constantly on the protagonists’ tails. This is so much better than in The Odyssey, where there is constant negotiations between the various gods. In O Brother there is no need for gods to cause turmoil, humans are good enough at that themselves. But like it or not, Death is always close behind us. “The law is a human institution.”

I find I have little to say about this movie. I could pick it apart, but as I said: it is a perfect film. Anything I could say is irrelevant, other than that it should be seen.

Afterword

The Coen Brothers claim that their main idea was to tell the story of The Odyssey in the Ma and Pa Kettle universe. When I was a kid, I hated those movies. But recently, I saw part of one on TV at my sister’s. It was funny as hell.