October 11, 2010
Robert Samuelson insists that the bond markets are forcing countries to adopt austerity in the middle of a downturn. This is not true. Bad economic policy, by the same people who gave us the Great Recession (how badly do economists have to mess up to get fired?) is forcing countries to adopt austerity in the middle of a downturn.
In fact the bond markets are making money available to countries like Germany, Japan, and the United States at very low interest rates, the exact opposite of the scenario that Samuelson describes. (Samuelson notes these low rates in passing, but doesn’t seem to understand their importance.) It is true that countries like Greece, Ireland, and Spain are paying much higher interest rates, but this has little to due with the generosity of their welfare states as Samuelson claims. It is due to the deliberate decision from the Great Recession makers at the European Central Bank (ECB) to squeeze these countries.
The situation of these countries is similar to that of individual states in the United States. They do not print their own currency and therefore are constrained in their ability to spend in a period of a downturn. The ECB does print money and could easily extend support to these countries during the downturn, but it has made a conscious choice to only do so insofar as they cut back on their welfare state benefits. Note this will not create inflation in the current situation; the economy’s problem is inadequate demand, not too much demand.
It is not the downturn that is forcing cutbacks, it is the people controlling policy at the ECB. These policymakers do not like to be publicly associated with their policy decisions so they no doubt appreciate columns like Samuelson’s that hide their role.
As a basic principle, there is no reason for general cutbacks in the welfare state. Societies are getting richer because of something called “productivity growth.” The cutbacks in the welfare state are simply part of the upward redistribution that policymakers in the U.S. and elsewhere have been pushing for the last three decades.
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