By William K. Black. This article was first published on New Economic Perspectives.
On February 6, 2014, Mario Draghi, the head of the ECB said a series of contradictory things each of which indicated a failure to understand economics – and the BBC article about his policies failed to point out or analyze this failure. Draghi’s primary message, in response to news that “Eurozone inflation slowed to 0.7% in January from 0.8% in December” was:
“We have to dispense with this idea of deflation. The question is – is there deflation? The answer is no.
We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding.”
As I explained in my January 25, 2014 column, the troika consists of the ECB, the EU Commission, and the IMF. The troika’s definition of the “recovery” it hopes for in Spain is grim. The troika made Spain its poster child for the success of austerity in late 2013. In early 2014 Spain admitted that unemployment had risen to 26 percent and the troika’s most over-the-top propagandist for austerity, Ollie Rehn, was the only one willing to comment on that news.
“Thursday’s figures were met with official silence in Madrid. But in an interview with El País, the European commissioner for economic and monetary affairs, Ollie Rehn, said that in Spain the EU had tried to combine the goal of solvent public finances with economic reforms.
‘There were no easy alternatives for Spain nor for anyone. Those that think there was a simple way to recover access to the markets without painful measures are wrong,’ he told the paper. ‘It will take 10 years to fix the Spanish crisis.’”
Spain Rains on Rehn’s Austerity Victory Parade: Unemployment Rises to 26%
Let’s review the bidding to this point on the troika’s claims about the “recovery.”
- The “very low [economic] level” that Spain, Italy, and Greece are “starting from” is a Great Depression – unemployment in these countries exceeds Great Depression levels
- “Is there deflation?” The answer is yes, some of the worst hit EU nations are already suffering from deflation. Several more are within a few tenths of a percentage point of deflation.
- The “recovery” they hope for is that Spain, by 2024, will exit the “crisis” stage
- They do not state how many years after that Spain might achieve full employment
- That is their optimistic scenario, which assumes there will be no serious shocks for the next decade – which is exceptionally improbable
- Spain’s bubble collapsed in 2006, so even if the grossly improbable optimistic scenario proved realistic the recovery simply from the “crisis” stage would take 18 years
- The “recovery” is “fragile” and requires “extreme caution” from the troika to protect and aid it
Deflation is the symptom: Use fiscal policy to treat the problem of inadequate demand
I have explained at length why the troika’s framing of the “deflation” issue indicates an abject failure to understand economics – and the media’s failure to even raise this point indicates how bad economic coverage is.
An economy like Spain is suffering from grotesquely inadequate demand. Monetary policy can make things worse, but it cannot produce a rapid recovery in such circumstances. Fiscal policy can. Deflation is simply a symptom that demand has become critically inadequate and the economy may soon fall back into recession. It is insane to wait until one is near deflation to act, but the reason isn’t that something suddenly happens when average prices fall. One should act as early as possible by using fiscal policy, as soon as it seems likely that a recession is about to begin, to counter the recession. The concept of waiting – in a Great Depression in Spain, Italy, and Greece – for things to get so bad that deflation sets in is economically illiterate. The further concept that when deflation sets in monetary policy (particularly quantitative easing (QE)) is the most effective means of stopping deflation demonstrates the triumph of theoclassical ideology over reality and experience.
We know that the troika pretends not to understand economics. The IMF periodically publishes studies showing the strong effectiveness of fiscal stimulus and warning about inadequate demand. What we are seeing from the troika is the triumph of ideology and German politics over economics and the resultant devastation of much of Europe’s periphery. What is harder to understand, particularly from the NYT, is why these more fundamental forms of economic insanity are virtually never discussed? The best thing Spain could do to fight its Great Depression would be to pay $20,000 for the travel costs to hold a seminar for the NYT’s business and financial reporters at which Dean Baker, Jamie Galbraith, Stephanie Kelton, Paul Krugman, Bill Mitchell, Warren Mosler, and Randy Wray would explain money, finance, demand, unemployment, inflation, growth, recession, fiscal and monetary policy, debt, and deficits. One problem, of course, is that Spain’s leader is a rabid austerian.
A recent NYT article on deflation shows the problem. It is actually a far better article than most NYT articles on the EU crisis – and that’s why I focus on it. At its best, the NYT is terrible on this subject – and that indicates the success of the troika’s insidious “there is no alternative” (TINA) meme. Economically literate alternatives disappear under TINA.
“‘In a deflationary environment, monetary policy may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument,’ the E.C.B. says on its website. ‘This makes it more difficult for monetary policy to fight deflation than to fight inflation.’
Many economists argue, though, that it is already past time for the E.C.B. to take some sort of further action.”
The ECB concedes it cannot counter deflation through monetary policy. The deeper truth, ignored by the NYT, is that the ECB showed that it could not counter Spain, Italy, and Greece from falling into recession in 2007, that the troika responded to their weak recovery from the recession with the imposition of austerity that forced their economies into a Great Depression, and that the troika’s (improbable) optimistic scenario is that Spain will emerge from “crisis” in 2024 – 18 years after its housing bubble burst in 2006 and made inevitable the first recession.
But the Great Depressions in Spain, Italy, and Greece literally disappear from the NYT’s account (which discusses only the existence of deflation in those countries) as does the use of austerity in a manner most akin to primitive “doctors” bleeding their patients to make them well – and then bleeding them more when the earlier “treatment” weakened them. Fiscal policy also literally disappears as an alternative – even when the ECB admits that monetary policy cannot work. The discussion becomes instead how long should the ECB wait and allow the patients (the unnamed Spain, Italy, and Greece) to bleed out until they reach the stage that can trigger organ failure. The only debate presented is how long the ECB should allow the patients to bleed out without treatment – an insane “debate.” And even then, the only treatment discussed is the use of monetary policy that even the proponents of austerity such as the ECB finally admit would be ineffective in treating the bleed. The word, and the concept, of “fiscal” policy are removed from the article and the debate.
This sitting back and watching while the troika continues to bleed Spain, Italy, and Greece through austerity is Draghi perverse understanding of the “extreme caution” he admits is essential when treating a “fragile” patient. The problem is grossly inadequate demand. The cure is for government fiscal policy to provide the demand. The cure prevents an aggravating syndrome of grossly inadequate demand – deflation – from arising. Instead, we are presented by the NYT with a “debate” between two sets of financial quacks. One group of financial physicians warns that we should be immediately wheeling the crash cart into the “recovery” room holding Spain, Italy, and Greece in case they “code.” The other group argues that we should wait a bit longer. If they continue to bleed out and their blood pressure falls to 70/50, then the ECB will call for the crash cart. Meanwhile, both sets of quacks continue to bleed the patient through austerity even though they know the problem is inadequate demand and they know that austerity further reduces demand (and causes human misery). In the world of medicine, we’d fire all of these quacks – including the reporters who covered the story without raising the obvious point that the doctors were quacks and their treatment was barbaric and harmed the patient’s recovery. Each of the quacks would soon be bankrupted by civil suits for malpractice. In economics, we promote the quacks to important positions.
The NYT article falls so totally for the troika’s framing of the obscenity of the gratuitous Great Depression that the troika inflicted on Spain and Italy that the following words essential to analyze the subject of the article never appear: fiscal, austerity, unemployment, poverty, migration, recession, and depression. The single most critical word, “demand,” appears only once and in a fashion consistent with the troika’s framing in the passage quoted above.
“‘In a deflationary environment, monetary policy may thus not be able to sufficiently stimulate aggregate demand by using its interest rate instrument,’ the E.C.B. says on its website.”
Notice that the ECB treats inadequate demand as a hypothetical that might occur should “deflation” occur. I explained that even the ECB concedes in this passage that monetary policy is generally ineffective in “stimulat[ing] aggregate demand” during a recession. The ECB, however, does not talk about recessions; it talks about “deflation.”
Inadequate demand is not a hypothetical. It has been the reality in the EU periphery for seven years – and the EU concedes that under its optimistic scenario it will be the reality in Spain for another ten years. Deflation is also not a hypothetical, it is real in much of the periphery and because there is nothing magical when moves from virtually non-existent inflation to deflation, the harms that the troika ascribe to deflation must have been phasing in for over a year in much of the periphery. (To mix medical metaphors: you give lots of clean water to cholera patients, preferably through ORT, and you continue to have them eat. Austerity kills cholera patients.)
The obvious answer to the inadequate demand that is causing such damage to the EU is fiscal “stimul[us] [of] “aggregate demand.” The troika, however, with the complicity of the financial media, have turned fiscal stimulus into a “crime” so vile that it “dares not speak its name.” This is passing odd given that we’ve known for at least 75 years that fiscal stimulus that provdes the inadequate demand actually works. Stimulus is the policy that Republicans follow in the U.S. whenever they hold the presidency and the Nation is dealing with a recession.
The NYT allows the troika to frame a “debate” that is the equivalent of a quarrel among “young earth” and “old earth” creationists about how to interpret Genesis in their design of course material for (not) teaching evolution and physics. A debate about evolution and physics that excludes the scientists would be an obvious farce. The NYT finds no need to alert its readers that economists have long known that fiscal stimulus of a magnitude large enough to provide the inadequate demand is highly effective. The human costs of this orgy of economic and journalistic malpractice are staggering and should be unacceptable to both professions.
NYT and WSJ financial reporters desperately need to get away from Wall Street. Come to the heartland. We’ll put on two days of discussions at UMKC to provide your journalists with the tools they need to escape the quacks’ framing. In the interim before you come, here is your cheat sheet. Inadequate demand causes recessions and can eventually lead to deflation. The solution to inadequate demand is for government fiscal policy to restore adequate demand.