Government Spending Alone Did Not Cause the Euro Crisis

Conservatives are wrong to place all the blame on government spending.

The contemporary rhetoric used by many conservatives when they are discussing Europe goes something like this: The Europeans spent too much, too quickly under the guidance of an over-centralized super-state and as a result are facing economic apocalypse; their future is ours if we don’t shrink government and cut spending. While I am all for shrinking government and cutting spending, the rhetoric being used by most American conservatives when they speak about the euro-crisis is misleading, intellectually dishonest, and lazy.

Mitt Romney offered such an account of the situation in Spain during the first presidential debate, where he said,

I—look, the revenue I get is by more people working, getting higher pay, paying more taxes. That's how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work—you'll never get there. You never balance the budget by raising taxes.

Spain—Spain spends 42 percent of their total economy on government. We're now spending 42 percent of our economy on government.

I don't want to go down the path to Spain.

These comments were understandably not well received in Spain, where at least one columnist pointed out that the U.S. has had similar spending-as-a-percentage-of-GDP to Spain’s for some time.

Obviously it's tempting for American conservatives, in an election that revolves around the economy, to use the European crisis as some sort of crystal ball. But there's more to the crisis than spending, which is why the economic crisis affecting the euro—a currency used by 17 countries with 17 different fiscal policies, cultures, and histories—is hard to summarize in pithy sound bites.

Saying that excessive spending will lead to the sort of situation being seen in Europe might be an effective way to convince Americans that we should embrace smaller government. However, the rhetoric does not match this “Europe is spending gone crazy” rhetoric. 

Some facts.

Excessive spending as the main reason for current economic misery can only be attributed to one of the five Euro Zone nations: Greece. Greece joined the euro at the beginning of 2001 after failing to join in 1999 because it did not meet the required economic criteria for membership.

In 2001 Greek debt to GDP was almost 104 percent. At the same time, most of the other Euro Zone nations had much lower debt to GDP. Ireland’s debt to GDP was 35.1 percent, Portugal’s was 53.5 percent, and Spain’s was 55.6 percent. In fact, in 2001, Germany’s debt to GDP was higher, at 59.1 percent, than the debt to GDP rates of Ireland, Portugal, and Spain. Italy is the exception; it was enjoying a debt to GDP rate of 108.2 percent in 2001. However, unlike Greece, Italy’s debt to GDP has stayed comparatively stable. So, it is far too simplistic to say that excessive spending is what has led to a crisis in “Europe.” Were spending alone to be blamed then more of the “northern” European countries like Germany would be facing situations similar to those being enjoyed by Spain. While the crisis in Greece is more closely related to fiscal irresponsibility, the other members of the club are in their own messes for different reasons.

Spain, which has been the focus of much concern recently, is hardly a great example of fiscal responsibility, but it is in its current crisis for reasons other than too much government spending. After the creation of the euro, Spain enjoyed its own housing bubble created in large part by money from banks based in other eurozone members like Germany. When the credit bubble burst much of this investment stopped and the Spanish housing sector was hit badly. Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash. This situation is similar to what happened in Ireland, which also had its own housing crisis.  

That conservatives have been completely misreading the euro-crisis does not mean liberals have read it correctly. In fact, their proposed solutions are just as misguided. Keynesians such as New York Times columnist Paul Krugman like to point to Europe as an area where austerity has been tried and failed. However, the data shows that Europe has not tried austerity. Spending amongst almost all European countries has nominally increased, as have taxes. What little reduction in spending some European countries have seen is due only to inflation.

The reality is that the euro-crisis is a lesson on easy credit and monetary policy. This is not to dismiss the fact that many of the Euro Zone nations were spending too much money. However, as other countries in Europe have demonstrated, it is possible to have similar levels of debt and not face the fiasco being ejoyed by the Greeks and Spaniards. 

In the mists of one of the most significant economic crises in recent memory it is sad to see the side that claims to speak for free markets and fiscal responsibility frequently misrepresenting the nature of the present crisis. Politicians on both sides of the Atlantic should be heeding the lessons of what is happening in Europe. It’s a shame it looks like so many of them won’t.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • ||

    the rhetoric being used by most American conservatives when they speak about the euro-crisis is misleading, intellectually dishonest, and lazy.

    Feeney really has no grounds to say that about anyone.

    Also this:

    http://www.nber.org/papers/w15639

    You are dead wrong Feeney....and that is not a conservative telling you so.

  • ||

    When the credit bubble burst much of this investment stopped and the Spanish housing sector was hit badly. Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash.

    can we now just assume Feeney is a drooling idiot?

    Really? Adjusting monetary policy works? Do you really need to see the graph that shows how badly the FED has done since its creation?

  • Jerry on the road||

    I think his point is more that regional imbalances in the US don't cause problems because a dollar in Texas is equal to a dollar in California. Undoubtedly this will create wealth transfers and can hamper economic growth. But in Europe, a Greek euro is not the same as a Spanish euro, simply because Eurozone member states have not tied their debt obligations.

  • ||

    But in Europe, a Greek euro is not the same as a Spanish euro

    I think my sarcasm meter is broken...

    You are being sarcastic right?

  • Jerry on the road||

    And a Spanish euro is not the same as French euro, and a French euro is not the same as a German euro...But the dollar is equal in all 50 states.

  • ||

    Just answer the question.

    Are you insane or simply being sarcastic?

  • VG Zaytsev||

    Just answer the question.

    Are you insane or simply being sarcastic?

    He's doing a poor job of channeling his heros Krugman, DeLong and Sumner.

  • ||

    That's not sarcasm. That's... trolling?

  • Proprietist||

    Huh? Texas's debt obligations are not tied with California's. What's the difference?

    California is still in debt largely because they haven't readjusted spending down for the reduced revenue due to the recession.

  • Jerry on the road||

    Texans and Californians are equally liable to pay off the federal debt. There is no such liability in the Eurozone, as it doesn't have central debt obligations.

  • ||

    Texans and Californians are equally liable to pay off the federal debt. There is no such liability in the Eurozone, as it doesn't have central debt obligations.

    So we are in agreement Feeney is wrong and spending is the problem.

  • Jerry on the road||

    No, the US simply enjoys more efficient "wealth transfers" within the system so that monetary policy doesn't seem like a problem. The Eurozone could set up a transfer union as well. Problem solved, but don't expect any economic growth soon.

  • ||

    doesn't seem like a problem.

    anemic growth, 8% unemployment, consumer confidence in the toilet, manufacturing destroyed, looming inflation...

    Yeah I see no problem with the US economy. In fact it is doing so awesome that the FED just randomly started QE3 for shits and giggles.

    but don't expect any economic growth soon.

    So the plan is to shift the debt to relatively debt free countries and to keep spending...oh by the way that won't do anything for the underlying problem with growth and therefor will do nothing to pay off the debt.

    Brilliant!!

  • Paul.||

    In fact, California will happily take Texas dollars to pay some six figure pensions!

  • BigT||

    Jerry, are you buying euros where they are cheap and selling them where they are dear? Where? I'd like some of that easy money!

  • Jerry on the road||

    You can buy Greek debt, and when the Eurozone countries decide to pool their debts you'll make a nice buck.

  • sasob||

    Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash.

    By "necessary adjustments" I presume he means quantitative easing or expanding the money and/or credit supply. Must be a real bitch not to be able to print money whenever they want to anymore. Tsk, tsk.

  • sasob||

    (sigh) Okay, what Fluffy said down thread - he expresses it better.

  • VG Zaytsev||

    You just don't understand that inflation cures all ills.

    /sarc

  • R C Dean||

    What Feeney does is point out that the various inputs into the problems (overweening state, excessive spending, real estate bubble) happened in DIFFERENT COUNTRIES in the eurozone, so obviously there is no way to analogize them to the US, where they happened in one country.

    Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash.

    As the Fed has shown, adjusting monetary policy is a sure cure for overleveraging and structural misallocations.

  • ||

    However, as other countries in Europe have demonstrated, it is possible to have similar levels of debt and not face the fiasco being ejoyed by the Greeks and Spaniards.

    Texas is doing good yet California isn't...

    Combined with the above information Feeney proves that government overspending is not a problem with the US economy.

    BRILLIANT!

  • Jerry on the road||

    Is Texas doing "great" because of a misallocation by the FRS?

  • ||

    No No No you are getting it all wrong.

    Texas is doing good cuz like Italy it can make monetary adjustments.

    Unlike California and Spain which can't.

    Haven't you heard of the Italian/Texas transnational bank? And their currency which is called the unobtainium?

  • ||

    Combined with the above information Feeney proves that government overspending is not a problem with the US economy.

    Except he's not saying it's not a problem here. He's saying it's not the only thing that caused the Euro Crisis.

  • ||

    He's saying it's not the only thing that caused the Euro Crisis.

    And that claim is absurd on its face.

  • ||

    How so?

  • Marshall Gill||

    Pretty simple, actually. Since most government spending is wasteful, more revenues when they have a wine dole makes absolutely no sense. Retiring people on government benefits when they are 55 makes no sense.

    It is as if Europe was my wife and she was purchasing diamond watches every single day. More revenue will not fix the problem because, of course, the problem is spending other people's money.

  • The Immaculate Trouser||

    The EU's debt:GDP ratio is 82%, and its tax rates *and* revenues are much higher than our own in most respects. Additionally, their labor markets are much more highly regulated than ours.

    Debt is an enormous component in explaining at least part of the current problem with the EU, and conservatives are more right than not about the status of the EU's member states vis a vis debt.

  • Sidd Finch||

    Were spending alone to be blamed then more of the “northern” European countries like Germany would be facing situations similar to those being enjoyed by Spain.

    I don't think I've ever seen a cardinal direction in scare quotes before.

  • Jerry on the road||

    Because it doesn't refer to Northern Europe but the northern Eurozone?

  • Death Rock and Skull||

    CIVIL WAR!!!!!

  • Ken Shultz||

    "The reality is that the euro-crisis is a lesson on easy credit and monetary policy. This is not to dismiss the fact that many of the Euro Zone nations were spending too much money. However, as other countries in Europe have demonstrated, it is possible to have similar levels of debt and not face the fiasco being ejoyed by the Greeks and Spaniards."

    Um...that gets something right, but...

    What we're really talking about is what the market will bear in terms of debt. If the market thinks the risk of holding your debt is too high, then it will charge you higher interest rates.

    If the market doesn't think your economy can generate enough in tax receipts to pay what the market demands given the state of your economy, then there might not be enough market participants who are willing to hold your debt--at any interest rate. That's what happened to Greece. The reason Germany is effectively financing Greece is because the market simply isn't willing to do that anymore...and the only price what few market participants there are would accept is so high, that there's just not enough of them for Greece to finance their huge debt by way of the market.

    Notice the solution to that problem--even after its financed--is to slash the budget. If your debt level is larger than what the market will bear, then you must slash your budget. There is no other long term solution.

  • ||

    What we're really talking about is what the market will bear in terms of debt.

    So you think Feeney is criticizing conservatives cuz the say spending is the problem and not debt?

    If that is true then why does Feeney spend a paragraph at the heart of his article using debt to GDP ratios as an argument against what he is saying the conservatives are saying?

  • Ken Shultz||

    My comments below address that.

    Yes, our debt to GDP ratio is higher than some of the countries who got in trouble, but you show me a country with a debt to GDP ratio that's significantly worse that one of the countries that got in trouble? And I'll show you a country with a relatively stable and dynamic economy.

    I believe Japan has a terrible debt to GDP ratio. I believe the U.S. has one that was similar to Italy's. If the U.S. and Japan haven't suffered the same fate as Greece, Spain, Ireland, and Italy, I would argue it's becasue the markets think the U.S. economy and the Japanese feature qualitative differences that make us more likely to be able to sustain a higher debt to GDP ratio...

    It's just like with a stock!

    Some of them command higher p/e ratios than others! Why? They might have the same earnings and the same expenses and the same revenue--the difference is that the market thinks some of them have differences in terms of their growth prospects. Some companies and industries have higher growth prospects than others...

    It's like that with the U.S. economy and Spain's or Greece's. GDP to debt isn't the only issue--how dynamic and likely to continue to grow is the U.S. and Japan's economies compared to Spain's and Greece's?

    That's the difference. There are qualitative differences between economies. It isn't just GDP to debt.

  • ||

    It's just like with a stock!

    Stocks with high profits do better then stocks with low profits.

    Countries with high debt-to-GDP ratios have lower GPD growth then countries with low debt-to GDP ratios.

    http://www.nber.org/papers/w15639

    yes there are differences between stocks and yes there are differences between countries...and yes those differences can be partially attributed to perception.

    But perception does not address the bottom line.

    Over spending is the problem everything else is noise.

  • Ken Shultz||

    I'm not arguing with the idea that overspending is the problem...

    I'm accounting for the differences Feeney was alluding to.

    It's no wonder that the markets treat different countries with the same debt to GDP ratios differently--once you take account of the qualitative differences between them.

    That is all.

  • Sudden||

    Not to sound like too much of a Steynian demographic bombadier, but I do believe one of the critical variables that factors in is the amount of new entrants that will be available to pay for debts incurred by the previous generation.

    Outside of Ireland, all of the EU countries that have been hit with the debt crisis have been Mediterranean countries with some of the world's lowest birthrates. There simply will not be enough Greeks, Italians, and Spaniards to pay for the prior excesses of their grandparents. Now, this obviously doesn't explain Japan which features the world's worst demographic issue, but I think it can account for why a country like Greece or Spain would be viewed less favorably than Northern European countries with similar overall debt to GDP levels.

  • Ken Shultz||

    The birth rate has dropped dramatically in Europe since before World War II, and the U.S. would have a shrinking population because of the dropping birth rate, too--if it weren't for immigration.

    I think that's one of the other big qualitative problems Europe faces is that it desperately needs immigrants and yet immigrants from the nearby places with few opportunities for locals aren't the immigrants they want...

    Those immigrants are seen as a terrorist threat by a lot of the European population, and because the Europeans have such a mature welfare state, low wage immigrants are seen as leeches on the welfare state.

    We're facing the same problems minus the terrorist threat here in the U.S. The more we socialize medicine, etc., the more we're forced to pay for each other's basic needs, the more hostile we become to immigrants who come here with very little.

    And, yet, our economy needs more immigration--among other reasons--because our population would decrease without them.

  • Marshall Gill||

    It doesn't include Japan? The country has has how many decades with zero or negative growth?

    Steynian demographic bombadier

    Because is points are irrelevant or just because they sound scary?

  • Marshall Gill||

    his

    A fucking preview would sure be nice.

  • Ken Shultz||

    I'm thinking maybe we should start a facebook group devoted to raising money to fix Hit Run's preview button.

    Because we care about people.

  • ||

    And to shoot the ampersand-eating squirrels.

  • Ken Shultz||

    Smith Wesson, Hit Run, Black Decker...

    What's the problem with ampersands?

    P.S. I can live without ampersands, I supposed. But no preview button makes all of us look like idiots. I type like I talk around here--I need to review it another window before I post it.

    I just do.

    Their, they're, there? Yeah, I know the difference--just not when I'm typing 90 miles an hour. And making people review themselves in a little window that's like a downgrade from notepad? That's like cruel unusual punishment!

    No ampersand again? Damn you, Ampersand-eating squirrels!!!

  • Ken Shultz||

    P.S. I can live without ampersands, I supposed. But no preview button makes all of us look like idiots. I type like I talk around here--I need to review it [in] another window before I post it.

    But you knew what I meant.

  • Ken Shultz||

    "If your debt level is larger than what the market will bear, then you must slash your budget. There is no other long term solution."

    It should be noted that the market sees higher levels of taxation as a threat to your economy's ability to pay your debt load as well.

    Raising taxes so high that it crushes your economy doesn't make the market feel any better about your economy's ability to generate enough revenue to pay your debt load either.

  • Fluffy||

    Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash.

    By "necessary adjustments", he means "destroy the value of the fiat currency".

    Since individual nation states don't control the currency, they can't debase the currency to enable their spending.

    Feeney is apparently unaware that this is a libertarian argument against fiat currencies - that when the government can debase the currency at will, it will use that power to enable large-state policies and Keynesianism.

    Feeney is lamenting the fact that these European nations were forced by circumstance to at least temporarily act like states without fiat currencies. Such states have to pay the piper eventually for deficit spending. "Poor European states! Pauvre pecheurs!" exclaims Feeney. "It's not your fault. If only you could debase your currency and steal from all your citizens, you would have been able to run huge systemic deficits for a little while longer!"

  • Ken Shultz||

    Easy credit can lead to bubbles, but that isn't the long term problem. The long term problem is things like inefficiency, government largess, a lack of productivity gains, trade protection, too high a level of taxation, lack of domestic investment, etc. Easy money may bring those problems to the surface and make them more apparent when a bubble bursts, but ultimately it's the health of your economy that determines how much debt you can carry and whether the market is willing to continue to finance your debt.

    The market will carry the debt of healthy, strong, vibrant, efficient economies for a lot longer--that's why we're the prettiest horse in the glue factory right now. That's why our interest rates are so low.

    ...but we're in line at the glue factory! Never forget that. And if our debt load continues to grow, we will eventually run out of market participants who are willing (or able) to continue to carry our debt at reasonable rates--as sure as the sun will rise tomorrow.

  • ||

    The long term problem is things like inefficiency, government largess, a lack of productivity gains, trade protection, too high a level of taxation, lack of domestic investment, etc.

    Yes the US and Europe have all these problems.

    But "!!!THE PROBLEM!!!" with Europe is their over spending and ever so high debt-to-GPD ratios.

    If a developed county has a high debt-to-gdp ratio then they are essentially cutting out 1% plus growth each year...making them far more susceptible to all the problems you listed above and far less equipped to deal with them when they come.

  • Ken Shultz||

    "But "!!!THE PROBLEM!!!" with Europe is their over spending and ever so high debt-to-GPD ratios."

    Yes, the problem is the spending, AND the reason we don't have the same problems Europe does (to the same extent) at the moment is becasue we have a better profile in terms of: inefficiency, government largess, a lack of productivity gains, trade protection, too high a level of taxation, lack of domestic investment, labor flexibility, etc.

    Those are the things that make the market price our debt differently despite our having a similar debt to GDP ratio as the economies that the markets are avoiding. So, honestly, anybody out there that wants to see us continue to carry huge piles of debt? Should be all in favor of slashing taxes, getting rid of inefficiency and government largess, pursuing free trade agreements, etc.

    Because that's where the real differences are!

  • Ken Shultz||

    "So, honestly, anybody out there that wants to see us continue to carry huge piles of debt? Should be all in favor of slashing taxes, getting rid of inefficiency and government largess, pursuing free trade agreements, etc.

    Because that's where the real differences are!"

    More precisely, I should have written, "Because that's what makes markets more willing to carry more debt."

    If Bill Clinton had any insight at all, he understood that the more the economy grew, the more money there would be available to grow government programs. Personally, I think using the proceeds of our growth to make the government bigger is a bad strategy, but at least he understood that things like free trade are good if they mean more economic growth...

    I don't think Obama understands that. I think he sees any competition for funds that could belong to the government as a necessary evil at best. For example, Obama sees trade policy as a vehicle for supporting unions and making our labor markets even more rigid.

    Obama doesn't know what he's doing.

  • Fluffy||

    This article is effectively the same as Feeney saying, "If only Spain and Greece had the flexibility within the EU to enact economy-wide wage and price controls, this all would have worked out for them!"

  • VG Zaytsev||

    Excellent point.

    Especially since that is exactly what his side wants via devaluation and inflation.

  • XM||

    I've read plenty of libertarian-ish commentators blaming the spending on the European crisis. John Stossel did, a couple writers at Cato did also.

    This was a popular notion across all center right leaning world. It's a bit disingenuous to pigeonhole a group as "conservatives" who got it wrong when surely they got such an idea from publications such as this.

  • ||

    I've read plenty of libertarian-ish commentators blaming the spending on the European crisis. John Stossel did, a couple writers at Cato did also.

    It is not just libertarians. It is pretty much the consensus among economists.

    http://neighborhoodeffects.mer.....esnt-work/

  • Paul.||

    I like this:

    In other words, the most credible spending reductions are those that are undertaken by left-of-center governments. So slash away, Mr. Obama!

    "Let Team Blue slash Team Blue stuff, because Obama supporters will still be Obama supporters, even while Obama is twisting the knife."

  • Proprietist||

    Technically what killed Europe (and is killing America) was failure to follow both sides of Keynesianism - if you want the government to be able to spend money and even rack up deficits in down years, you have to be willing to cut government/increase taxes and pay off debts in up years.

    Politicians on both sides of the Atlantic wrongly embraced Keynesianism to mean perpetual spending and deficits. When you're already running deficits every year when it's the salad days, imagine the deficits you have to run when, say, a housing bubble collapses. Eventually the market can't bear the weight and the currency suffers. Had all these countries had relatively balanced budgets and minimal debt before the recession hit, the market could bear a little interim debt without serious long term consequences or monetary devaluation.

  • Red Rocks Rockin||

    Much of this is human nature: if the budget can be expanded to serve my department or agency, then it will be expanded. There are other organizational tropisms as well: ENA, for example: "everyone needs an assistant," including the current assistant.

    When an economy is growing rapidly, then the waste, fraud, duplication, inefficiency and bloat go unnoticed because tax revenues and the budget are rising even faster than the bloat and inefficiency. The problem arises when tax revenues fall. Then the bureaucratic impulse to never-ending growth is stymied, and the various bureaucracies turn inward as they muster their forces to wage internecine warfare with other protected fiefdoms...

    At some point, the mission of the bureaucracy is completely lost, and the citizens' patience with institutional incompetence and self-aggrandizement finally runs out.

    http://www.oftwominds.com/blog.....12-10.html

  • Paul.||

    At some point, the mission of the bureaucracy is completely lost, and the citizens' patience with institutional incompetence and self-aggrandizement finally runs out.

    AKA, greedy private sector.

  • Sevo||

    Proprietist| 10.12.12 @ 5:48PM |#
    "Technically what killed Europe (and is killing America) was failure to follow both sides of Keynesianism - if you want the government to be able to spend money and even rack up deficits in down years, you have to be willing to cut government/increase taxes and pay off debts in up years."

    Which, similarly to communism requiring the 'new soviet man' to work, is the reason Keynesianism *can't* work.
    There simply is no government which would ever do that.

  • Marshall Gill||

    Not only could they never slash taxes and pay off debts, the idea that, even in hard economic times, the government will do anything but waste money is only believed by the stupid or those who are fleecing the public.

  • ||

    If my friend wrecks his car doing 60 around a neighborhood traffic circle and I don't wreck my car doing 60 down a superhighway, I can still conclude that his accident was due to speed.

    Spain, Portugal and Greece all overspend. It's not the sole cause of their problems, but it's contributing. Pointing out similarities in spending between them and the US isn't genius level economics, but it isn't "misleading, intellectually dishonest, and lazy."

    The US is doing 60 around a two-way blind turn. There's nothing wrong with pointing out that 60 can be dangerous.

  • ||

    If my friend wrecks his car doing 60 around a neighborhood traffic circle and I don't wreck my car doing 60 down a superhighway, I can still conclude that his accident was due to speed.

    +16 trillion

  • MisterDamage||

    "These comments were understandably not well received in Spain, where at least one columnist pointed out..." Exactly the same thing that Romney was referring to. Romney points out that the US economy is in danger of going the way of Spain and Spanish columnists "rebut" this by pointing out that The US economy shares close similarities with Spain.

    Weird.

  • Almanian's Evil Twin||

    Oh, it's just like someone reaading a US-based blog to point out that the Spanish press accused the US of doing what Mitt Romney said, when the US press accuses the US of doing what Mitt Romney said.

    Wait....wha...??

  • Almanian's Evil Twin||

    One of the weaker articles I read today. Surely, you can do better, Feeney? Yes?

  • Alien Invader||

    Nope.

  • Marshall Gill||

    Somebody has to play the Weigel.

  • Ken Shultz||

    Yes, but how many somebodies?

    We have at least two Weigels already--maybe three.

  • Death Rock and Skull||

    "Were spending alone to be blamed then more of the “northern” European countries like Germany would be facing situations similar to those being enjoyed by Spain."

    Feeney's logic is simplistic on this. Debt and economic policy was key for all the countries that are in crises like Greece, and is bad for all of the countries with high debt he lists including the U.S. Just because not all of them have had the same severity of crisis at the same time does not mean they are immune. They are just douchey enough in economic relations to push it off for now, and most likely will be able to prance away like hot shit yet again.

  • Death Rock and Skull||

    It is not dishonest or ignorant to say socialist/entitlement policy is the root of all the problems when government incentivizing shenanigans in housing markets fits nicely in that.

  • Alex the wolf||

    The main problem in the european economies is that they are totally overtaxed and overregulated.
    For example, most countries have value added taxes (pretty similar to sales taxes) at 20% rates or even more. Payroll taxes can account to 50% of the total wage if you add up what the employer and the employee pays (its all taxation of work), labor regulations are tremenodus, for example if a company wants to fire an employee it may have to pay him 15 wages or things like that (that makes unemployment so high) and income taxes are also very high. All this results in slow productiviy economies and large black markets, which have low productivity because the black market cannot make investments (investments need laws to protect the property rights)

  • ||

    I like this rationale.

    "All this results in slow productiviy economies and large black markets, which have low productivity because the black market cannot make investments (investments need laws to protect the property rights)."

    Which is why Italians are probably the most "rational" economic people. Italy is so Byzantine, the people know it's impossible to deal with, hence the market goes black. As I've point out elsewhere, its black markets is about 35% to 60% of its GDP.

    Italians don't invest their money like other countries in the G8. Market Cap there is far less than even Canada. There's simply no trust. Yet, they have high personal net worth and savings.

    The people basically give the middle-finger salute to the state.

  • YinxDoo||

    I never thought about it like that. Makes sense dude. Wow.

    www.UA-Anon.tk

  • ||

    I am not an economic wiz...but it seems to me Feeney goes on and on about how spending is not the only problem, then offers one additional problem; easy credit and the creation of real estate bubbles. Arent those created by government backing of loans (i.e. government spending) ? Then when those loans cant be paid back the bubble bursts? Is that an incorrect or oversimplified way of looking at things?

    Is he basically saying " Spending more than you have is not a bad idea in itself"?

  • Ken Shultz||

    To some extent, I think he's arguing that easy money or low interest rates by the central bank is also a big contributor to the problem.

    However, we've had relatively low interest rates and relatively low inflation for so long, I think a lot of people are putting the cart before the horse...

    Fact is that the Fed can't go against the market rate for very long. If the short term end of the yield curve spiked up to 7% on Monday and stayed there, the Fed would have to raise the federal funds rate to meet it eventually. There are negative aspects for holding the rate significantly higher than where the market is trading warrants, too.

    By criticizing the Fed's easy money policy (in retrospect), we're really criticizing them for not being able to predict the future in real time.

    At what point after 9/11 or so was the Fed supposed to look at market interest rates and say, "Ah, the economy is overheating--time to stop the easy money policy."? It's certainly true that the quality of the borrowers dropped dramatically, but the credit markets were not overheated in terms of interest rates.

    I don't think we want a Fed that thinks it knows better than the market to the extent that it's willing to make huge bets against what the market is saying.

  • Ken Shultz||

    There's this thing called the Business Cycle, and the inability of people to predict the future with precision leads to misinvestment. The solution to that problem isn't insist that central banks start predicting the future with precision. That isn't ever going to happen until the Singularity or Jesus comes back.

    Point is that you can't avoid the business cycle, but you can make your economy more resilient so that when downturns hit, they aren't as precipitous and they don't last as long. You do that by doing things like keeping your debt ratio low relative to GDP, fighting labor rigidity, keeping the level of taxation low, pursuing free trade policies, and all the other things I keep talking about.

    The Fed correctly predicting the future in identifying bubbles and then going against market signals to prevent them from growing just isn't one of the options. I know there are a lot of people who criticize the Fed, essentially, for not being able to predict the future, but the reason they can't predict the future with precision isn't because they have the wrong people there or because they aren't following the right philosophy or becasue they haven't been audited...

    And instead of focusing on things we can't really control, we should focus on things like taxation and spending that we can control. And having a lot less debt when the pool of investors in your debt contracts is a lot better than having more outstanding debt than the market is willing to finance.

  • heart_of_flint||

    What about Europe's burdensome labor regulations? Governments can regulate an economy to death even if their spending is moderate. A singular focus on spending doesn't explain massive youth unemployment.

  • Ken Shultz||

    Damn straight.

    That's labor rigidity right there.

    I'd be really reluctant to hire people if I knew I'd never be able to fire them.

    Imagine how reluctant workers would be to take a new job if they knew they could never quit.

    I think that's one of the big attractions of hiring illegal labor, actually. You can fire them at the drop of a hat, and there's nothing, usually, they can do about it.

    I suspect making it easier to fire people would do a lot to make illegal immigrants less attractive as employees, and it would do a lot to make the unemployed more employable, too.

  • Danno||

    How about 'Debt Spending' caused the crisis? Ultimately the aggregate debt is society's debt. That can be a mix of government and private, but it doesn't matter the mix ratio only the total debt to GDP. Of course for America, having the reserve currency as a result of Brenton Woods helps it delay its reckoning.

  • Danno||

    The Euro area is one big "Vendor-Finance Scheme". Think GM. This is why France and Germany are scared: they don't want a GM-like collapse. But who bails out the Euro? China???

  • pradaguccioutlet@gmail.co||

    Since the program’s creation, the Energy Department has guaranteed $16 billion in loans for a total of 26 projects. Although Section 1705 is mainly known for funding such high-profile bankruptcies as Solyndra and Abound Solar, the companies it helps generally do well. That’s because most of the loan guarantees have gone to projects backed by large and financially secure companies. For instance, the energy producer Cogentrix, recipient of a $90 million guarantee, is a subsidiary of the investment bank Goldman Sachs. There’s every reason to believe Congentrix could have obtained a loan on its own.cheap nfl jerseys State backing confers subtler advantages as well. In 2010 the Government Accountability Office concluded that federal subsidies signal to investors that a company is relatively safe, a perception that helps attract additional private capital. During a July 18 statement before the House Committee on Oversight and Government Reform, Craig Witsoe, former CEO of Abound Solar, one of the Section 1705 companies that recently went under, explained that his company managed to collect an additional $350 million from private investors after it had secured its government guarantee. Much of that funding could be the product of the security that the federal support implied.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement