April 11, 2003

Out of Touch

The Economist complains that continental Europe's economic policies are out of touch with reality:


Economist.com | Economies after the war: Europe faces many of the same problems as America, but with a much less accommodating economic policy. Conventional wisdom has long held that Europe would avoid most of America's post-bubble fall-out because far fewer Europeans own stocks. That sanguine attitude looks increasingly wrong.

Investment in Europe has been contracting since the middle of 2000, and Europe's bank-dominated financial system may be exacerbating the post-bubble hangover. In Germany especially, bank profits are weak, corporate insolvencies are surging, and falling equity prices have eroded banks' reserves. An IMF analysis suggests that these factors are heightening banks' risk aversion and undercutting the credit process, a tale that bears some similarity to Japan's. Add to this the fact that labour and product markets are still too rigid, and it is small wonder that the outlook for Europe is grim.

Moreover, policymakers are much less helpful than in America in easing the adjustment. Although Germany's government recently announced plans to cut job protection and improve work incentives, the overall pace of deregulation has been snail-like. With central bankers obsessed by fears of inflation, monetary loosening has been too little and too late. The European Central Bank cut rates to 2.5% in March, but failed to cut them again last week, despite a fresh barrage of gloomy figures. Fiscal policy is no better, hamstrung in the euro area by the strictures of the stability and growth pact. Germany, for instance, is cutting spending and raising taxes, even as its economy weakens...

Posted by DeLong at April 11, 2003 11:04 AM | TrackBack

Comments

Could someone tell me who the good guys are these days? The US is fucked, Europe's fucked, Japan's fucked, China's fucked. Nobody's OK except maybe Singapore.

I'm not accusing anyone of alarmism; the criticisms seem to be true. But with across-the-board-problems like that, isn't it reasonable to conclude that major problems loom?

Speaking as a defeated leftist -- wasn't the total domination of capital supposed to lead to good fiscal sense and stability, at least ?

Posted by: zizka on April 11, 2003 03:40 PM

Could someone tell me who the good guys are these days? The US is fucked, Europe's fucked, Japan's fucked, China's fucked. Nobody's OK except maybe Singapore.

I'm not accusing anyone of alarmism; the criticisms seem to be true. But with across-the-board-problems like that, isn't it reasonable to conclude that major problems loom?

Speaking as a defeated leftist -- wasn't the total domination of capital supposed to lead to good fiscal sense and stability, at least ?

Posted by: zizka on April 11, 2003 03:42 PM

My impression was that Europe might have a problem with DEFLATION in the near future. And what will deregulation do for the recession. What does deregulation have to do with the business cycle (it is good policy but does not adress inadequate aggregate demand)?

Posted by: Bobby on April 12, 2003 02:30 AM

My impression was that Europe might have a problem with DEFLATION in the near future. And what will deregulation do for the recession. What does deregulation have to do with the business cycle (it is good policy but does not adress inadequate aggregate demand)?

Posted by: Bobby on April 12, 2003 02:30 AM

I really don't understand the obsession with Germany's strict Employment Protection Legislation. For years now we've heard that if only the Germans weaken their EPL, employment will boost. Well, I guess that remains to see. But, if you study the empirical papers performed on this subject, they hardly support the "derugalation gang". Let's hope I'm wrong though.

Posted by: Mikael S on April 12, 2003 03:32 AM

The irony of your post, zizka, is that I expect the usual post from David Thomson saying that Europe's troubles are in fact due to too much socialism (along, of course, with general moral laxity).

Neither you or David are right - the roots of the present trouble are not really microeconomic. Rather they're the result of very poor macro policy (what's happening is pretty much what some critics of the stability pact predicted), exacerbated by the effects of having an aged population.

Posted by: derrida derider on April 12, 2003 03:37 AM

Well, I think it's hard to argue that the natural rate of unemployment in, say, France being much greater than in the U.S. is not due to poorly designed and generous unemployment insurance as well as regulation that makes it costly for employers to hire and fire labor (there is an excellent piece by Krugman on it here http://www.pkarchive.org/global/EuropeJobless.html ). However the recent increase from that natural rate is a business cycle issue.

By the way, I'm not saying that France's economy is necessarily a worse system than ours. It's a choice to have more justice and more unemployment, as well as probably more inefficiency. The question for the French economy is whether they can decrease their NAIRU without trading away too much of that justice.

Posted by: Bobby on April 12, 2003 10:22 AM

Well, I think it's hard to argue that the natural rate of unemployment in, say, France being much greater than in the U.S. is not due to poorly designed and generous unemployment insurance as well as regulation that makes it costly for employers to hire and fire labor (there is an excellent piece by Krugman on it here http://www.pkarchive.org/global/EuropeJobless.html ). However the recent increase from that natural rate is a business cycle issue.

By the way, I'm not saying that France's economy is necessarily a worse system than ours. It's a choice to have more justice and more unemployment, as well as probably more inefficiency. The question for the French economy is whether they can decrease their NAIRU without trading away too much of that justice.

Posted by: Bobby on April 12, 2003 10:22 AM

Man, that double-posting is out of control.

My main point was that we apparently have major economic problems in all of the world's big economies. Doesn't this mean that there's going to be a global problem which will intensify the four local problems? Seemingly at the moment everything is dragging down and nothing is lifting.

Posted by: zizka on April 12, 2003 10:46 AM

But the problem is not one of lack of fiscal sense. Alan Greenspan is close to zero, and if he cuts interest rates to zero (and he will delay probably until it's too late), it's not clear that this will be enough to revive the economy. It is a problem of inadequate demand, ineffective monetary policy, and perhaps deflation which will help keep us in a slump for a long time. THis is not the most likely scenario for our near future (Paul Krugman says the chance of deflation is 20%), but it is scary that we are as close as we are. An immediate fiscal stimulus, as opposed to a delayed one, does not seem likely. Again it is not the most likely scenario.

Posted by: Bobby on April 12, 2003 11:06 AM

Although it looks like everyone who has commented so far would agree, I would like to mention that way too many U.S. states have balanced budget provisions (not to mention lower credit ratings) which make it difficult for anyone other than the Fed Gov. to engage in fiscal expansion. One doesn't realize the extent of economic ineptitude of politicians until you see state legislatures falling all over themselves to cut spending in the middle of a recession. In that sense, Europe's problems are hardly unique.

Posted by: andres on April 12, 2003 01:04 PM

Bobby, I would agree that the NAIRU is somewhat higher in Europe than in the US, and that this is partly by choice, and that this choice might be reasonable in terms of social welfare.

But unemployment in contintental Europe, especially Germany, is way above the NAIRU at present, and heading higher. _That_ is primarily an issue of poor macro policy.

Posted by: derrida derider on April 13, 2003 06:51 PM

Bobby, I would agree that the NAIRU is somewhat higher in Europe than in the US, and that this is partly by choice, and that this choice might be reasonable in terms of social welfare.

But unemployment in contintental Europe, especially Germany, is way above the NAIRU at present, and heading higher. _That_ is primarily an issue of poor macro policy.

Posted by: derrida derider on April 13, 2003 06:52 PM

Bobby:

Read for example:

OECD Employement Outlook [1999]: No significant evidence that strict EPL creates higher NAIRU.

Nickell [1997]: No significant evidence that strict EPL creates higher NAIRU.

Bertola [1990]: No significant evidence that strict EPL creates higher NAIRU.

Also, it's not generally true that strict EPL lowers labour market flexibility. It lowers numerical flexiblity, no question about that. But, it also tends to increase functional flexibility.

I'm not saying its harmful for Germany to weaken their EPL, but many economists tend to believe this will resolve the "Eurosclerosis" dilemma. I think they're really fooling themselves.

*It should be said that most theoretical work comes to the conclusion that strict EPL raises NAIRU. But hey, most theoretical work comes to these conclusions concerning all kinds of regulations...and I'm an empirical guy. So, while they might be technically beuatiful, they seem to be poor in judging reality.

Posted by: Mikael S on April 14, 2003 02:26 AM

I don't know when the Economist decided that Europe was identically equal to the territory occupied by the Federal Republic of Germany, but I wish they'd stop. The facts appear to me to be that "Europe" is not in such bad shape, and that they have a monetary policy roughly appropriate for the Euro area as a whole. A far more productive way of looking at the problem is to say that the weakness of the German rustbelt has allowed the ECB to maintain an approriately stimulative low interest-rate environment which has allowed Ireland and Spain to boom and achieved something approaching macroeconomic balance in France.

Posted by: dsquared on April 14, 2003 07:47 AM

What about Holland - lots of social protection, unemployment lower than the UK, Ireland...

Posted by: Gabe on April 14, 2003 09:52 AM

In Spain unemployment benefits are quite less than in Germany or France, still we have one of the highest rate of unemployment and of inflation, so all this NAIRU talk seems a little carent of foundaments.

DSW

Posted by: Antoni Jaume on April 14, 2003 12:08 PM

Well... I don't know much about the Netherlands, but we're looking at "social protections" as rather homogenous. Swedish-style social transfers without a lot of market regulation are different from German-style, command-and-control legal regulations.

I know that was a very predictable point that everyone saw coming at some point in this thread, but I think it might be part of the answer to "what's up with the Netherlands?"

Second, at the risk of becoming a new David Thomson in the eyes of the other commentators here, there's the bristly issue of culture involved: after all, Belgium has regulations that apply to all of the country, so why the gap between Walloon and Fleming segments?

Posted by: Julian Elson on April 14, 2003 03:18 PM

dsquared is right as far as he goes. But if Germany could still run an independent monetary policy then you could get the gain (the boom in Ireland and Spain) without the pain (the German recession). Indeed, Ireland and Spain would have a better chance of making their booms sustainable if their monetary authorities weren't bound by what's happening in Germany.

In short, there's no way the euro bloc is an optimal currency area. And the stability pact rules out using fiscal policy as a substitute.

Posted by: derrida derider on April 14, 2003 05:38 PM

dsquared is right as far as he goes. But if Germany could still run an independent monetary policy then you could get the gain (the boom in Ireland and Spain) without the pain (the German recession). Indeed, Ireland and Spain would have a better chance of making their booms sustainable if their monetary authorities weren't bound by what's happening in Germany.

In short, there's no way the euro bloc is an optimal currency area. And the stability pact rules out using fiscal policy as a substitute.

Posted by: derrida derider on April 14, 2003 05:39 PM

"Second, at the risk of becoming a new David Thomson in the eyes of the other commentators here, there's the bristly issue of culture involved: after all, Belgium has regulations that apply to all of the country, so why the gap between Walloon and Fleming segments?"

Hey, the water is fine. Just take a deep breadth. Put in your little toe---and the rest of it get's very easy. Culture is always unavoidably very important. Commenting on it does not make you a per se racist or scum bag.

Don't forget the cultural differences between the west Germans and their eastern counterparts. The result of many decades of Communist ideology upon the latter rendered them lazy and shifless. Needless to add, both groups are essentially from the same ethnic and racial background.

Posted by: David Thomson on April 15, 2003 01:10 AM

"But if Germany could still run an independent monetary policy then you could get the gain (the boom in Ireland and Spain) without the pain (the German recession). Indeed, Ireland and Spain would have a better chance of making their booms sustainable if their monetary authorities weren't bound by what's happening in Germany."

Please get serious. Germany is messed up because of an unwillingness to sufficiently come to grips with its out of control socialist policies. It's as simple as that. Talking about "independent monetary policy" is avoiding the real issues. At the very best, it's of secondary importance.

Posted by: David Thomson on April 15, 2003 01:23 AM

"One doesn't realize the extent of economic ineptitude of politicians until you see state legislatures falling all over themselves to cut spending in the middle of a recession."

Gosh, apparently somebody has been reading the works of Ludwig Von Mises and Friedrich Hayek. Thankfully, these politicians are forced to cut spending. Think what would eventually occur if the federal government bailed them out. Have you ever met any spoiled kids who know that their parents will always pull their financial bacon out of the fire?

Posted by: David Thomson on April 15, 2003 01:33 AM

Derridaderider wrote:

>>But if Germany could still run an independent monetary policy then you could get the gain (the boom in Ireland and Spain) without the pain (the German recession).>Gosh, apparently somebody has been reading the works of Ludwig Von Mises and Friedrich Hayek<<

Someone has, but you haven't, and I'd appreciate it if you owned up sooner rather than later.

Posted by: dsquared on April 15, 2003 03:57 AM

Well that was a buggered up post wasn't it.

My reply to derrida derrider was that I didn't think it likely that Ireland or Spain could have run interest rates below 3% as independent entities without facing a currency crisis (an Australian of all people ought to know that!), and thus that their ability to have had this boom without the euro is illusory.

The request to admit to not having read a book was directed toward Thomson, natch.

Posted by: dsquared on April 15, 2003 04:04 AM

"The request to admit to not having read a book was directed toward Thomson, natch."

In the future, either be specific concerning your criticisms---or please remain quiet. You are being careless and childishly flippant. My comment was directed toward somebody other than "Derridaderider." You obviously need to learn how to read.

You are not even close to being my intellectual equal. Get used to it, for that's the cold reality of the situation. I have the ability to get to the nitty gritty while you are barely able to repeat the lazy liberal platitudes of the day.

Now where were we? Can anybody find any weaknesses in my line of argumentation? I am willing to take on any well thought out objections.

Posted by: David Thomson on April 15, 2003 07:04 AM

Why are the economies of the Old Europeans deteriorating? The following scandal should prove helpful:

“Tuesday, April 15, 2003 :::

INJUSTICE IN THE NETHERLANDS. Volkert van der Graaf, the radical animal rights activist who assassinated Pim Fortuyn on May 6, 2002, has today been convicted to a paltry 18 years inprisonment. The DA had demanded life. Dutch friends assure me that everyone who is well-behaved in Dutch prison is automatically released after 2/3rds of the sentence. That means the murderer is due to be released in 2014. I should perhaps add that one of the three judges, the controversial Nol Vermolen, is a known member of the Labour Party, who has been accused of involvement with supplying illegal immigrants with falsefied papers when he worked for a refugee organization. Mr Van der Graaf said he was brought to his deed to protect the "weaker members of society", including the Muslims. UPDATE: Not sure if this is true, but someone just told me that prisoners can start going home for the weekends after nine years!”

http://www.giantsanddwarfs.blogspot.com/

This is further evidence of the moral corruption and intellectual confusion of the Old Europeans. The cold blooded murderer of Pim Fortuyn will likely serve only ten years in prison. This speaks volumes of why their economies are going downhill. Socialism inevitably eviscerate the values required to underpin a viable society. Unfortunately, many of the participants on this forum prefer employing macroeconomic jargon. And this silliness only prevents them from getting to the nitty gritty.

Posted by: David Thomson on April 15, 2003 07:49 AM

David, I wonder if it's standard procedure for you to base your argument on a single hyped-up data point. No doubt there are zero cases of individuals in this country who have gotten 18 years or less for murder, or who have been found not guilty on the basis of the flimsiest possible reasoning and in the face of overwhelming evidence of guilt. Care to quote any aggregated comparative statistics on US vs. European sentencing for murder cases?

Posted by: andres on April 15, 2003 08:41 AM

Thomson wrote:

>You are not even close to being my intellectual equal.

which is true, and which gets truer every time I read a book and you don't.

Andres wrote:

>David, I wonder if it's standard procedure for you to base your argument on a single hyped-up data point.

Which is presumably litotes; Andres has been around on this board long enough that it's simply implausible that he's still wondering about this.

Posted by: dsquared on April 15, 2003 10:25 AM

"Care to quote any aggregated comparative statistics on US vs. European sentencing for murder cases?"

Please don't be so silly. There is almost certainly no example in American history similar to this current outrage. And please do not point to the racist juries in the deep South of some forty years ago. The Dutch court made its decision based on the current so called ideals of that Old European nation. The odds are that the judges perceive this evil monster as some sort of victim. Pim Fortuyn’s murderer supposedly does not deserve punishment as much as he requires therapeutic assistance.

And yes, my posting is most relevant to the discussion at hand. The Old Europeans are morally corrupt---and this directly impacts upon their overall economy.

Posted by: David Thomson on April 15, 2003 10:32 AM

Thomson wrote:

>You are not even close to being my intellectual equal.

which is true, and which gets truer every time I read a book and you don't.

Andres wrote:

>David, I wonder if it's standard procedure for you to base your argument on a single hyped-up data point.

Which is presumably litotes; Andres has been around on this board long enough that it's simply implausible that he's still wondering about this.

For what it's worth, in 1998, the average sentence for murder in US State courts was 263 months, and the average murderer who was not sentenced to death or life imprisonment served 47% of his sentence.

Posted by: dsquared on April 15, 2003 10:34 AM

“For what it's worth, in 1998, the average sentence for murder in US State courts was 263 months, and the average murderer who was not sentenced to death or life imprisonment served 47% of his sentence.”

The statistic you are pointing to is not in the least bit relevant. It likely does not deal with first degree premeditated murder. Many murders are acts of passion where somebody momentarily lost their temper. We are talking about a political assassination where the evidence is overwhelming---and the murderer is quite candid about his atrocious action. On top ot that, the Dutch court mentioned its hope for the scum bag’s rehabilitation.

In this country, the judge would have instead rightly emphasized the convicted criminal's punishment. Does anybody really believe that Lee Harvey Oswald would have received a similar sentence for murdering JFK? Once again, an ultra egalitarian Socialist economy eviscerates the moral values of its citizens. This is also the central reason why these soft individuals prefer to kiss the rear ends of the Saddam Husseins.

Posted by: David Thomson on April 15, 2003 10:57 AM

From Scientific American:

Most Western countries have put more people behind bars in recent years, but in none has the incarceration rate risen more than in the U.S. The cause of the extraordinary American figure is not higher levels of crime, for the crime rate in the U.S. is about the same as in western Europe (except for the rate of homicide, which is two to eight times greater, mostly because of the ready availability of guns).

and

Two British criminologists, Leslie Wilkins (retired) and Ken Pease of the University of Huddersfield, have theorized that less egalitarian societies impose harsher penalties. Imprisonment thus becomes a negative reward, in contrast to the positive reward of wealth. The theory perhaps explains why the U.S. has higher incarceration rates than other Western countries, where income inequality is less extreme, and why rates began to rise in the early 1970s, shortly after income disparities began rising. If the theory is correct, high U.S. incarceration rates are unlikely to decline until there is greater equality of income.

http://216.239.53.100/search?q=cache:M2cSbF7goVIC:www.sciam.com/article.cfm%3FarticleID%3D000AD44D-AD5C-1C72-9EB7809EC588F2D7+crime+rates+u.s.+europe&hl=en&ie=UTF-8

Posted by: The Tooth on April 15, 2003 01:18 PM

David Thomsom sez:

"Please don't be so silly. There is almost certainly no example in American history similar to this current outrage"

Next to your statement about winning the war in Iraq in 7 hours, may I suggest you place the following name:
"O.J. Simpson"

Your intellect is indeed as herculean as your objectivity.

Posted by: StrontiumDog on April 16, 2003 01:27 AM

"O.J. Simpson"

This is a ludicrous example. O.J. Simpson was found innocent (although I think wrongly) in a court of law. The murderer of Pyn Fortuyn was deemed guilty. Can’t you do better than that?

“Next to your statement about winning the war in Iraq in 7 hours”

We will never know what might have occurred if our forces has unarguably killed Saddam Hussein the very first few hours of the war. Still, the ultimate results make me look damn good! I think I deserve a B+. The Casandras are the ones who should be embarrassed by their foolish predictions of gloom and doom.

Posted by: David Thomson on April 16, 2003 04:11 AM
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