Austerity Reigns Over Euro Zone as Crisis Deepens - Nelson Schwartz via NYTimes.com

The European ‘debt crisis’ is not about debt, it’s about recession and the unwillingness of Europe’s leaders to take Keynesian steps to stimulate demand. They continue to preach austerity during a massive recession, which threatens their financial union, and could lead Europe and the rest of the world into a protracted depression.

It’s like watching a drunk fall down the stairs, at this point.

Nelson Schwartz via NYTimes.com

Despite a move by the European Central Bank on Dec. 21 to provide 489 billion euros in cheap, long-term credit to European banks, the central bank remains reluctant to take more aggressive steps to become the lender of the last resort as the Federal Reserve did in the wake of the financial crisis in the United States in 2008.

In particular, the European bank has remained steadfast in its opposition to buying up sovereign debt outright, for fear of encouraging a return to the kind of deficit spending that got countries like Greece — which continues to rely on bailout money — into trouble in the first place. But the bank’s move to inject liquidity on Dec. 21 was seen as a kind of backdoor way of supporting government bonds, since it is likely that a substantial portion of the money the banks borrowed was quickly parked in sovereign bonds.

[…]

Despite a move by the European Central Bank on Dec. 21 to provide 489 billion euros in cheap, long-term credit to European banks, the central bank remains reluctant to take more aggressive steps to become the lender of the last resort as the Federal Reserve did in the wake of the financial crisis in the United States in 2008. In particular, the European bank has remained steadfast in its opposition to buying up sovereign debt outright, for fear of encouraging a return to the kind of deficit spending that got countries like Greece — which continues to rely on bailout money — into trouble in the first place. But the bank’s move to inject liquidity on Dec. 21 was seen as a kind of backdoor way of supporting government bonds, since it is likely that a substantial portion of the money the banks borrowed was quickly parked in sovereign bonds.

Meanwhile the Germans are making bank on increased exports given a weakening Euro, and have the lowest unemployment rate in Europe, but this beggar-my-neighbor stance cannot last. The people of Europe’s rim countries — Greece, Italy, Spain, Portugal, and Ireland — are bearing the brunt of austerity policies so that banks can get paid back for debts incurred in the real estate bubble by other investors. This situation will not last, and I predict widespread unrest starting as soon as winter begins to abate. Technocratic governments imposed by Europe’s central banks — led by Germany and France — will be hounded out of office.

But it may all come too late to avoid the crash and the dissolution of the Eurozone and maybe the EU, which I think will happen in early summer 2012.

Cities’ Cost Cuttings Leave Residents in the Dark - Monica Davey via NYTimes.com

Newest sign of austerity: cutting back on street lights.

Monica Davey via NYTimes.com

Cities around the nation, grappling with what is expected to be a fifth consecutive year of declining revenues and having exhausted the predictable budget trims, are increasingly considering something that would once have been untouchable: the lights.

Highland Park’s circumstances are extreme; with financial woes so deep and long term, it has extinguished all but 500 streetlights in a city accustomed to 1,600, utility company officials say. But similar efforts have played out in dozens of towns and cities, like Myrtle Creek, Ore., Clintonville, Wis., Brainerd, Minn., Santa Rosa, Calif., and Rockford, Ill.

What distinguishes these latest austerity measures is how noticeable they are to ordinary residents. If health care cuts, pay cuts, layoffs and furloughs — and even limits on enforcing building codes or maintaining parks — are most apparent to the people inside city halls, everyone notices when his streetlights go dark (and some cities, like Colorado Springs, where the issue boiled over, have already resumed some lighting when revenues allowed).

Turning off the lights has drawn grumpy crowds to city council meetings, stirred jealousy among neighborhoods and neighbors, and set off conversations about crime.

The cost savings seems to be the sole motivator of this trend, but what about the green dimension? Should we be burning all that oil to make the dark hours of night light? Even when people aren’t around? Is it sustainable? Probably not.

If cities were on a solar set-up — charging during the day to run lights at night — it would be a different story. But the majority of cities simply have been buying electricity from utilities, the majority of which is fueled by coal and natural gas: unsustainable sources.

Can’t people carry flashlights?

Can you remember the last time you felt a national leader looked us in the eye and told us there is no easy solution to our major problems, that we’ve gotten into this mess by being self-indulgent or ideologically fixated over two decades and that now we need to spend the next five years rolling up our sleeves, possibly accepting a lower living standard and making up for our excesses?

- Thomas Friedman, The Whole Truth and Nothing But

Friedman does it again. Once again he looks at the financial ruin of America and blames the victims. Why do we have to accept a lowered standard of living, and rolling up our sleeves for five years of austerity? The rich 1% own 90% of everything! We’ve been robbed systematically for 30 years, and now the GOP wants to institutionalize it with more tax cuts.

But Friedman never talks about the burglar, living up at the top of the hill. He keeps shaking his head, telling us that we have to pay for the broken window the burglar broke, and pay higher taxes for the cops that didn’t protect us, and then buy another set of silver to replace what the burglar stole. It’s time for the President, he says, to tell us to roll up our sleeves.

We have a culture where individualism has become so pathological that we cannot heap up our collective experience as victims and craft it into solidarity

What I want to know is this: when will the President — or any other credible leader, for that matter — stand up and say that those who have become billionaires by rigging a system to impoverish everyone else are our enemies, and we need to restructure the system — a completely new social contract — so that their wealth is redistributed.

And the working and middle class of America — and the growing ranks of the poor and unemployed — will not accept new privations, new austerities.

We have a culture where individualism has become so pathological that we cannot heap up our collective experience as victims and craft it into solidarity. As Steinbeck said, ‘Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires’, which is why so many poor people in America vote for the GOP: they identify with the rich, even though the rich are screwing them over.

But a sufficient dose of austerity — once the street lights are turned off, school class size grows to 50+ because of layoffs, and cities and town cannot afford to rebuild streets after floods and fires — that might start to mobilize people.

But we have to reject the implicit individualistic self-loathing, that we brought this on ourselves, by accumulating too much personal credit card debt and buying houses we couldn’t afford in a down market. That we stole our own future from ourselves.

No, Tom, we are not the ones that did this. We borrowed on the credit cards when real wages dropped in the ’90s, when two worker families were already the norm. We bought big houses in the ’00s to grab onto the American dream, and to own an asset that everyone — including the banks and our leaders — promised us would appreciate. But they all lied to us.

The banks have been bailed out, but now we are told we have to pay our own debts, plus the new debts that our government has taken on to write down the costs of the housing bust. Oh, and a few wars in Asia where we are busy spreading ‘democracy’, which loosely translated means global free trade, making billionaires happy again.

Enough. We won’t accept it. We want our money back. We want our future back. We want our country back.

And Tom, stop saying we have to accept what the leaders, the billionaires, and the banks decide for us. This is our world too.

A Wave of Setbacks May Push Europe Into a New Downturn - NYTimes.com

Jack Ewing and Julia Werdigier via NY Times

Another recession is already well under way in Greece and Portugal, while growth in countries like Spain, Italy and Britain has been very slow since last year. But now Germany, which has been remarkably strong, hauling the rest of the Continent along with it, seems to be decelerating. The Ifo Business Climate Index, considered a reliable predictor of German growth, fell in July as executives became less optimistic about exports.

“It is more than a soft patch,” said Eric Chaney, chief economist at a French insurer, the AXA Group. “The business cycle is really coming to a quasi-standstill in Europe.”

Worse-than-expected results from companies like Daimler, Deutsche Bank and Siemens in the last month have reinforced the feeling that Germany’s extraordinary boom is near an end. E.On, Germany’s largest utility, said on Wednesday that it might need to cut as many as 11,000 jobs after experiencing the first loss since it was created a decade ago from a group of state-owned utilities.

E.On attributed the loss chiefly to the government’s decision to force some of the company’s nuclear power plants to close early, but sales declines in foreign markets like Britain and Hungary also played a role.

Even companies that have done well are warning about risks ahead. “The coming months will be challenging for us,” Martin Winterkorn, the chief executive of Volkswagen, said in late July after the carmaker reported that profit more than tripled, to 4.8 billion euros ($6.8 billion).

A big problem for Europe is that domestic demand is weak and growth has become primarily dependent on sales from abroad, where the signals are flashing yellow. The United States, still the largest foreign market for companies like BMW, is slowing and could slip into recession. The earthquake, tsunami and nuclear disaster in Japan had a greater impact on global trade than economists expected. And demand from China and emerging markets is slackening.

[…]

Despite the risk of another recession, the British government has vowed to stick with its £80 billion ($130 billion) austerity program, which is expected to cost 300,000 public sector jobs.

“It’s pretty harsh times,” said Dave Knight, secretary for the Unison trade union, which represents workers for the Waltham Forest Council in the North of London, an area hit by unrest. Of four council offices, three will close, he said. A team of five psychologists who counseled troubled students will lose their jobs.

So, the faltering European economy is sliding into recession again, and austerity thinking has won across the continent. A recipe for disaster.

One toe stub, one more sovereign debt crisis (France?), will pitch Europe into depression. Meanwhile, the civil unrest will mount directly in relation with uncertainly and austerity.

They are telling generations of Europeans that their future is less important than the banks’ balance sheets.

Austerity Leads To Political Unrest

Putting aside the ideological wrangling about the riots in the UK and elsewhere, here’s some science:

Jacopo Ponticelli and Hans-Joachim Voth, How much will they hate it? Unrest and budget cuts over the long run

From the end of Germany’s first democracy in the 1930s to the anti-government demonstrations in Europe after 2009, austerity has tended to go hand-in-hand with politically motivated violence and social instability. Economists have long argued that unrest and attempts at revolution are more likely when incomes are temporarily depressed – the opportunity cost of trying to change the existing order is low (Acemoglu and Robinson 2001). One key determinant of the level of unrest should then be the scale of government expenditure cuts. We assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability.

In a new working paper, we examine if there any regularities that emerge from the history of political and social unrest since World War I (Ponticelli and Voth 2011).

We look at five different types of instability – anti-government demonstrations, riots, assassinations, general strikes, and attempted revolutions – in Europe over the period 1919-2009. The data comes from a large-scale international data collection (Banks 1994), and is based on an analysis of reporting in the New York Times. The individual indicators are then aggregated by summing them up for each country and year. This gives the variable called CHAOS. Figure 1 shows how it evolved over time since 1919, presenting the mean and the maximum. The interwar years show a high level of unrest, as does the immediate post-World War II era, and the period from 1970 to the early 1990s.

Figure 1. Number of incidents in Europe, 1919-2009

Next, we examine if the variation in Figure 1 can be explained by the scale of austerity measures. Figure 2 summarises the main result. The bars show the number of incidents per country and year. As the bars get darker, budget cuts get deeper. In an average country and year, when spending is increasing, one should expect about 1.5 incidents.

Once expenditure is cut by more than 2% of GDP, instability increases rapidly in all dimensions, and especially in terms of riots and demonstrations. Severe cuts – of 5% or more, as in Greece today – are associated with the highest level of instability. A similar pattern has been documented for Latin America after World War II (Voth 2011).

Figure 2. Unrest and budget cuts

Is this a ‘d’uh’ sort of analysis? I guess not, since so many people are seemingly eager to throw out all sorts of red herrings about what’s at work in the riots.

If you amp up austerity in hard times, the disaffected young — the 600,000 in the UK who have never had a single job — will burn the motherfucker down, because they have nothing to lose. Full stop.

h/t @wonkmonk_

No serious banker any longer believes Greece can pay all that it owes on time. Greece got itself into this mess. But Europe will have to help it get out. It will become even harder the longer Europe waits and pretends.

One Year and Many Billions Later for Greece - NYTimes.com

The NY Times says the obvious: Greek debt must be restructured, not increased, and Europe will have to accept it, or Greece will default and quit the euro.

From a creditors’ point of view, which the European Union authorities have apparently adopted, a country that has accumulated too much debt must be punished, so as not to encourage “bad behavior.” But punishing an entire country for the past mistakes of some of its leaders, while morally satisfying to some, is hardly the basis for sound policy.

There is also the idea that Greece — as well as Ireland, Spain and Portugal — can recover by means of an “internal devaluation.” This means increasing unemployment so much that wages fall enough to make the country more internationally competitive. The social costs of such a move, however, are extremely high and it rarely if ever works. Unemployment has doubled in Greece (to 14.7 percent), more than doubled in Spain (to 20.7 percent) and more than tripled in Ireland (to 14.7 percent). But recovery is still elusive.

[…]

The bottom line is that Greece cannot afford to settle for any deal that does not allow it to grow and make its way out of the recession. Loans that require what economists call “pro-cyclical” policies — cutting spending and raising taxes in the face of recession — should be off the table. The attempt to shrink Greece’s way out has failed. If that’s all that the European authorities have to offer, then it is time for Greece, and perhaps others, to say goodbye to the euro.

Mark Weisbrot, Why Greece Should Say No to the Euro

Do the scare-mongers even believe their own stories? Maybe not. As Jonathan Chait of The New Republic notes, the politicians most given to apocalyptic rhetoric about the deficit are also utterly opposed to any tax increase; they argue that debt is destroying America, but they’d rather let that happen than accept even a dime of higher taxes. Yet the inconsistency and probable insincerity of their fear-mongering hasn’t stopped it from having a huge effect on policy debate.

Paul Krugman, Fears and Failure

Republicans Shelve Medicare Overhaul Plan - Carl Hulse and Jackie Calmes

GOP is already backing away from Ryan plan to privatize Medicare, and they will insist they are dropping it because it can’t get passed, not because even conservatives won’tline up for it:

While top Republicans insisted that they remained committed to the Medicare initiative, which had become the target of intense attacks by Democrats and liberal groups in recent weeks, the lawmaker who would have to turn the proposal into legislation said he had no plans to do so any time soon.

The lawmaker, Representative Dave Camp, Republican of Michigan and chairman of the Ways and Means Committee, said that while he still supports the party’s Medicare approach, opposition from Democrats made it pointless to proceed.

“I’m not interested in talking about whether the House is going to pass a bill that the Senate shows no interest in,” Mr. Camp said in an appearance at the National Press Club. “I’m not interested in laying down more markers. I am interested in solutions.”

They took it out to the huskings, and almost were ripped limb from limb by their constituents.

But the mutterings won’t die down, now that they have started. If the GOP can’t move ahead on the centerpiece of their budget plan, it’s likely that the entire plan is unacceptable to the country. They can argue for austerity all they want, but to have any impact significant changes will have to come from health care and military budgets. But the people have rejected the GOP’s way of dealing with health care costs. It’s now up to Obama to come out for a jobs program and closing tax loopholes, while he has the wind in his sails after the bin Lauden exploit.

Coupled with remarks by other House Republican leaders, his statement suggested that the party’s Medicare proposal had been shelved, even though the party’s lawmakers had taken a risky vote to pass the budget in the House just last month, and in the past two weeks had attempted to sell it to constituents in often-stormy town hall meetings.

Medicare Heats Up House in Upstate New York - Raymond Sanchez

NY Times piece zeroes in on the shift in the public mood about GOP austerity politics, now that the Ryan plan — particularly privatizing Medicare — has become widely understood. A special election in suburban Buffalo between two women, Jane Corwin (R) and Kathy Hochul (D) is a bellwether of the whirlwind that the GOP are going to reap:

After leveling a barrage of attacks against the proposal put forth by Mr. Ryan, the Democratic candidate, Kathy Hochul, has tightened the race considerably, even as her Republican opponent remained supportive of the plan, perhaps out of concern that distancing herself from it would alienate conservatives.

The shifting dynamics of the race, which have emboldened top Democrats and their allies, underscore the intense reaction to Mr. Ryan’s proposal, the centerpiece of a budget that House Republicans voted to approve in April to address the nation’s long-term financial problems.

More than that, though, the May 24 special election is suddenly shaping up as the first electoral test of the Republican agenda — and of the likely themes in the battle next year between both major parties for control of the House.

[…]

Mr. Ryan’s proposal would transform Medicare into a program that subsidizes health coverage for older Americans, eliminating the direct payment for medical care that the federal government currently provides. In addition, the Republican plan would end the federal guarantee of health care benefits for retirees by turning Medicare into a grant program for states, leaving open the possibility that governors and legislatures would cut back in tough fiscal times.

The House Republican plan to fundamentally revamp Medicare has resonated in the 26th District, where a majority of registered voters are 45 or older. The district, which stretches from the western suburbs of Rochester, through dairy farming country, to small villages and towns northeast of Buffalo, is one of New York’s more conservative regions, with roughly 30,000 more registered Republicans than Democrats.

[…]

Ms. Hochul ran a weeklong television advertising campaign accusing Ms. Corwin of backing an effort that would end Medicare while providing tax breaks to the rich.

But even as some House Republicans have started to express doubts about the wisdom of trying to push the Ryan plan this year, Ms. Corwin has vigorously defended it, arguing it places Medicare on sound financial footing. “This protects the Medicare program and ensures that there are benefits for future generations,” she said during a recent stop last month in Rochester, according to The Democrat and Chronicle of Rochester.

[…]

A recent Siena College poll of likely voters, for example, indicated that Ms. Corwin and Ms. Hochul are in a tight race. Ms. Corwin leads by only five points, within the poll’s margin of error.

The poll found that 59 percent of respondents said they opposed reining in federal spending by cutting entitlement programs like Medicare. Only 38 percent said they supported such spending cuts to trim the deficit.

If the GOP plan can’t win in that region, with their traditional base, 2012 will be a bloodbath.

The GOP is going to backpedal. They will say it was all a misunderstanding: they never intended blah, blah, blah.

Ryan’s plan will die a death by a thousand cuts, but the electorate will remember. Especially if the Democrats start a push for job creation, instead of playing chicken with the GOP.

One vision has been championed by Republicans in the House of Representatives and embraced by several of their party’s presidential candidates. It’s a plan that aims to reduce our deficit by $4 trillion over the next ten years, and one that addresses the challenge of Medicare and Medicaid in the years after that.

Those are both worthy goals for us to achieve. But the way this plan achieves those goals would lead to a fundamentally different America than the one we’ve known throughout most of our history.

A 70% cut to clean energy. A 25% cut in education. A 30% cut in transportation. Cuts in college Pell Grants that will grow to more than $1,000 per year. That’s what they’re proposing. These aren’t the kind of cuts you make when you’re trying to get rid of some waste or find extra savings in the budget. These aren’t the kind of cuts that Republicans and Democrats on the Fiscal Commission proposed. These are the kind of cuts that tell us we can’t afford the America we believe in. And they paint a vision of our future that’s deeply pessimistic.

It’s a vision that says if our roads crumble and our bridges collapse, we can’t afford to fix them. If there are bright young Americans who have the drive and the will but not the money to go to college, we can’t afford to send them. Go to China and you’ll see businesses opening research labs and solar facilities. South Korean children are outpacing our kids in math and science. Brazil is investing billions in new infrastructure and can run half their cars not on high-priced gasoline, but biofuels. And yet, we are presented with a vision that says the United States of America – the greatest nation on Earth – can’t afford any of this.

It’s a vision that says America can’t afford to keep the promise we’ve made to care for our seniors. It says that ten years from now, if you’re a 65 year old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today. It says instead of guaranteed health care, you will get a voucher. And if that voucher isn’t worth enough to buy insurance, tough luck – you’re on your own. Put simply, it ends Medicare as we know it.

This is a vision that says up to 50 million Americans have to lose their health insurance in order for us to reduce the deficit. And who are those 50 million Americans? Many are someone’s grandparents who wouldn’t be able afford nursing home care without Medicaid. Many are poor children. Some are middle-class families who have children with autism or Down’s syndrome. Some are kids with disabilities so severe that they require 24-hour care. These are the Americans we’d be telling to fend for themselves.

Worst of all, this is a vision that says even though America can’t afford to invest in education or clean energy; even though we can’t afford to care for seniors and poor children, we can somehow afford more than $1 trillion in new tax breaks for the wealthy. Think about it. In the last decade, the average income of the bottom 90% of all working Americans actually declined. The top 1% saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes? They want to give people like me a two hundred thousand dollar tax cut that’s paid for by asking thirty three seniors to each pay six thousand dollars more in health costs? That’s not right, and it’s not going to happen as long as I’m President.

The fact is, their vision is less about reducing the deficit than it is about changing the basic social compact in America. As Ronald Reagan’s own budget director said, there’s nothing “serious” or “courageous” about this plan. There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires. There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill. And this is not a vision of the America I know.

The America I know is generous and compassionate; a land of opportunity and optimism. We take responsibility for ourselves and each other; for the country we want and the future we share. We are the nation that built a railroad across a continent and brought light to communities shrouded in darkness. We sent a generation to college on the GI bill and saved millions of seniors from poverty with Social Security and Medicare. We have led the world in scientific research and technological breakthroughs that have transformed millions of lives.

This is who we are. This is the America I know. We don’t have to choose between a future of spiraling debt and one where we forfeit investments in our people and our country. To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m President, we won’t.

via Washington Examiner

Obama has found his Brave Heart moment: the line that he will not cross. In tonight’s speech on the budget he’ll spark a national referendum on taxing the rich to pay off the national debt, and I applaud him for it.