Normative Narratives

Economic Outlook: Why Economics Failed (EU Edition)

1 Comment

Special thanks to Dr. Darryl McLeod for the graph!

The Importance of A Strong EU:

In 2012, The European Union won the Nobel Peace Prize, a symbolic award mean to show appreciation for the global importance of a unified European in the midst of the continents  most serious economic downturn since WWII:

The European Union‘s three presidents have collected the Nobel peace prize in Oslo in recognition of six decades of work promoting “peace and reconciliation, democracy and human rights”.

David Cameron was one of six EU leaders who decided not to attend. But his deputy, Nick Clegg, was there to represent the UK at the Nobel Institute.

Attendees heard the Nobel committee president, Thorbjoern Jagland, praise the EU’s role in transforming a European “continent of war” into a “continent of peace”.

“That should not be taken for granted – we have to struggle for it every day,” he said.

European commission president, José Manuel Barroso, said: “This is an award for the European project – for the people and the institutions – that day after day, for the last 60 years, have built a new Europe. “We will honour this prize and we will preserve what has been achieved. It is in the common interest of our citizens. And it will allow Europe to contribute in shaping that ‘better organised world’ in line with the values of freedom, democracy, human rights and rule of law that we cherish and believe in.

Indeed, I have advocated for a stronger role for Europe in ensuring global security, promoting democracy, human rights and rule of law throughout my “End of Team America World Police” series. Europe has to play a greater role in security both for budgetary and practicality reasons; it is much closer to Africa and the Middle East, the U.S. public is war weary, and we cannot have groups such as Boko Haram, ISIS (Islamic State of Iraq and Syria), and the Yemen-based Al Qaeda in the Arabian Peninsula thinking they can act with impunity (or join forces).

The EU is currently holding parliamentary elections, and anti-EU parties expect to gain seats:

These far-right and far-left groups will not win anything approaching enough seats to take control. But they could get around a quarter of them, amplifying their voice in debate and giving them more opportunities to slow down measures that the Brussels bureaucracy and international economists say could help save Europe from a Japan-style “lost decade” of anemic growth and policy stasis.

These include initiatives to bind the 18 countries that use euro currency closer together and open up Europe’s markets to greater competition, including from the United States.

Set up in the 1950s as a common assembly to introduce an element of democracy into the nascent European project, the parliament became directly elected in 1979 as part of push to narrow the chasm between Europeans and the arcane work of integrating their economies that few ordinary people cared about and even fewer could understand.

This anti-EU sentiment, while expected during times of economic downturn, is actually counter-effective. The issue holding back the EU recovery is insufficient integration; and this is not news. Since well before the existence of the Euro, economists have known that while some factors favored the chances of Eurozone success (such as geographic proximity and high level of trade, what is sometimes known as the gravity theory of international trade), others factors raised red flags (lack of fiscal integration, cultural and language differences which hold back the flow of residents from high unemployment to low unemployment areas).

The U.S. is an optimal currency union; everyone speaks English, and can move about the country fairly easily. Furthermore, we have the worlds largest Federal Government and most powerful National Bank anchoring the economy. As bad as the Great Recession was in America, it was irrefutably worse in Europe (and not because of their generous social welfare systems, because of the lack of fiscal integration).

And now the anti-EU sentiments are hunkering down for the zombie apocalypse, instead of fostering the closer bonds (both fiscal and cultural) needed to return the EU to a position of global leadership and prosperity. A strong unified Europe is important both for the European Economy and global security and development, hopefully whoever wins seats in the EU Parliamentary Election understands this.

Why Economics Failed:

This anti-intellectual refute of economic theory reminds me of a recent Paul Krugman Op-Ed, “Why Economics Failed”:

On Wednesday, I wrapped up the class I’ve been teaching all semester: “The Great Recession: Causes and Consequences.” (Slides for the lectures are available via my blog.) And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?

I don’t mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.

Essentially, economics didn’t fail, policy-makers failed ECON 101. Any economist worth a damn understands that economics is always “context-sensitive”. Appropriate economic policies are different during “good times” and economic downturns; economic policy should be “counter-cyclical”, saving up during good times to pay for essential safety net and stimulus programs out of a surplus in bad times. Instead we had the Bush Administration give tax breaks during good times, part of a much larger misguided concept of “starve-the-beast” economic policy.

Of course one could argue most policymakers are aware of the economics and just beholden to vested interests, in which case I would say your probably right more often than not.

And amazingly, across the pond. a parallel dismissal of textbook economics is also playing out in Europe. Instead of pursuing closer fiscal and cultural integration, the EU seem to be drifting apart.

Economics: Art or Science?

I have always believed that Economics is more “art” than “science”, particularly when it comes to responding to crises. In such instances, policy responses have to be made before robust economic analyses can be conducted; policy makers have to rely on intuition and historic lessons, alongside economic theory and context.

But it is not scientific deficit which has led economics to “fail” in recent history. From dogmatic misinterpretation of Adam Smiths “Invisible Hand” (only in the presence of proper safeguards and regulations), to the inflationary / rising borrowing cost effects of fiscal expansion (not in a liquidity trap), to the benefits of currency unions (but only under certain conditions, as explained above), it has been an inability / unwillingness by “conservative” factions on both sides of the Atlantic to grasp the conditions in which certain economic theories operate. As an economist, the solutions to the short-term problems facing advanced economies are frustratingly obvious.

Sometimes I think the only solution is teach everyone economics and political science once in middle school and again in high school. In a functioning democracy people set the agenda, does it not make sense invest in an informed (and therefore more engaged) citizenry?

America the Anecdotal:

America has indeed become the anecdotal nation. We do not have to be, it is a collective conscious choice we have made (or a series of choices we choose not to make). It seems Europe has become anecdotal as well.

Maybe it is part of a concerted effort by fast food chains and entertainment conglomerates to brainwash…No–we cannot blame conspiracies. Sure, vested interests will do all they can to maintain power imbalances, but is this really an excuse, or have the people who live in the world’s most modernized, democratic societies just become lazy and complacent?

I leave my readers with a quote from Matt Taibbi’s best seller “Griftopia”, “America is no longer a country that cares about experts. In fact, it hates experts. If you can’t fit a story into the culture-war storyline in ten seconds or less, it dies. (2 Taibbi references in blogs this week; you go Matt!)

It takes a bit more civic responsibility to build egalitarian, progressive societies; I for one think it’s worth the effort.    

Advertisements

One thought on “Economic Outlook: Why Economics Failed (EU Edition)

  1. Pingback: Economic Outlook: Developing or Developed, National Investment Into “Quality” Jobs Yields Strong Returns | Normative Narratives

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s