One of Governor Romney’s criticisms of President Obama is that he “takes his political inspiration from Europe….”
Romney never gives specifics on this criticism. The irony is that Romney (and Representative Ryan) “takes his political inspiration from Europe” and that the European policies they embrace have already proven disastrous in Europe. Here are five examples:
- Austerity. European austerity has promptly forced the Eurozone back into recession. Romney, channeling Germany’s Prime Minister Merkel, claims that deficits are “immoral” and must be ended. Austerity is pro-cyclical policy that makes recessions far more severe. It has pushed several European nations into Great Depression levels of unemployment, which has reduced income and tax revenues and increased budget deficits. The EU’s Stability and Growth Pact (an oxymoron designed by regular morons) produces instability and negative growth by banning EU nations from using effective counter-cyclical fiscal policies that have proven successful for decades in reducing the severity and length of recessions.
- Slashing working class wages. Ryan is an implacable opponent of unions and wants to end the minimum wage. Merkel is demanding the repeal of European laws protecting workers and is coercing the periphery to reduce working class wages. Unemployment rates are roughly 25% in Spain and Greece and the unemployment rate for the young is nearly 50%. The old sick joke is true again in Ireland – its leading export is the Irish. Real wages in Europe has fallen and unemployment has increased sharply.
- Ryan wants to remove the Federal Reserve’s statutory mandate to seek full employment consistent with price stability and have it subject to a solitary mandate to maintain price stability. That mimics the disastrous single mandate of the European Central Bank (ECB). The ECB lacks the legal authority to help the nations of Europe respond to the worst economic catastrophe since the devastation caused by World War II. It is an insane policy. The ECB’s crippled mandate meant that our Federal Reserve had to intervene in Europe to save several European Central Banks from collapse, which could have led to a global depression. Ryan wants to adopt a European policy that has proven grotesquely self-destructive.
- Romney wants to end any vigorous financial regulation. He is inspired by the now infamous European “lite touch” regulation. The United Kingdom (UK) epitomized lite touch regulation. The failure of most of the UK’s largest banks, the Libor, HSBC, and Standard Chartered scandals and the allegedly rogue operation of JPMorgan’s Chief Investment Office in the City of London constitute a record of failure and scandal without equal. Romney and Ryan oppose any serious regulation of banking and call for the immediate repeal of the Dodd-Frank Act in its entirety and the re-adoption of European-style “lite touch” regulation.
- Romney’s lead economic advisor, N. Gregory Mankiw, continues to champion the regulatory “competition in laxity” that produced the “race to the bottom” that simultaneously destroyed effective financial regulation throughout the developed world. This perverse dynamic has created the criminogenic environments that drive our recurrent, intensifying financial crises. Mankiw is pushing the “need” for the U.S. to win that race to the bottom against the City of London. The only way to “win” a race to the bottom is to refuse to race, but Mankiw takes his policy inspiration from Europe and the City of London. Mankiw’s advice has caused Romney to ignore the recurrent disasters and the warnings of effective regulators, economists, and white-collar criminologists that his European-inspired anti-regulatory policies are criminogenic.
The truth is that Europe has some excellent and some terrible economic policies. Romney and Ryan have shown an unerring talent for embracing Europe’s worst financial policies and denigrating its best policies. What is amazing is that no matter how badly the European policies fail, Romney and Ryan ignore the failures and promise to drag us down the path to inevitable failure. Romney and Ryan complain about unemployment in the U.S. while pushing Europe’s austerity policies that would massively increase unemployment, debt, and deficits in the United States.
This post was originally published at New Economic Perspectives and is reproduced here with permission.
6 Responses to “Romney Takes his Political Inspiration from Europe’s Worst Mistakes”
While it is important to understand that government spending is a component of GDP, and if government spending contracts, then GDP will contract. That is, unless and until the private sector is expanding. It is important to understand that there is no free lunch, as Milton Friedman said.
That means that for every dollar the government sector spends, it must come from the private sector, either in current tax dollars or future debt repayment. However, the inverse is not true. The government sector is not the engine of growth (i.e., Keyensian economics does not work because there is no multiplier effect). In fact, government spending acts as a drag on the private sector.
So, to complain that austerity in the government sector is bad for the economy is the Sophists' logic. If government spending were the panacea, then we should all be government employees with high salaries and generous health and retirement benefits. But we all know that does not work, even in a purely socialistic or communistic society. There are limits to government growth and government spending.
Politicians who are structurally unable to know how best to allocate stimulus resources will inevitably distribute them to those persons and groups who will give them the most electoral support. The Austrian caution about the limits of politicians’ knowledge suggests that no matter what is drawn up on the blackboard, the politicisation of stimulus spending is not an accident and cannot be avoided. Stimulus spending that goes to groups that will provide the most votes will ensure that the right combinations of capital and labour will not be formed.
So what can we do? The answer lies in the criticism: free up competition, prices, profits, and losses so that entrepreneurs and others can finish the process of tearing down the mistakes of the boom and figure out how to reallocate those resources to their new best uses. That process takes time, but if politicians cease meddling in it and start allowing market processes to do their job, particularly by allowing failed firms to go bankrupt and sell off their assets for more valuable uses, recovery will take place more quickly.
Before the advent of Keynesianism, most recessions were very short lived as producers were left free to shuffle the jigsaw pieces into better combinations. It is the very lack of trust in markets, and the misguided trust in the political process, that Keynesianism produced that now leads us to think stimulus spending is necessary and effective. Hayek and the Austrians give us good reasons to think otherwise.
Usually I find Professor Black's comentary inciteful and based on his extensive background in banking company regulation. However, in these comments not only does he misss the boat, but falls into the water. Much of what he says here about Romney's economic and regulatory proposals is shallow, politically biased and unsupported. I am not defending any Romney position, but Professor Black's insistence that the calls for revisons of Dodd-Frank are calls from a wide variety of economists. Gerald A. Hanweck, Professor of Finance, George Mason University
As Professor Black knows full well, the lax regulatory enforcement leading to the S&L crisis was repeated in the U.S. from 1994 to 2010 for all banks and for the large, international banks since at least the advent of Alan Greenspan's Chairmanship of the Federal Reserve and now with Chairman Beranake. The era of the "drive-by exam," as it came to be known in the post-1994 era led directly to the unsustainable housing bubble and the financial debacle growing out of that. It was U.S., homerown enforcement, not an adoption of the European "lite touch," that was responsible for the excesses of banks and particularly the largest banks. Dodd-Frank does not even address these issues or one of the most damaging, the excesses of Freddie, Fannie and the FHA.
Why won't Merkel let Greece and Spain go back to what they know best? Build bureaucracy and housing respectively, both useless and both with borrowed money. That is sure to raise the all important GDP. Let's add some regulation also – about 75 kilo's should do it – yeah, give some work to those poor lawyers.
Since embracing capitalism over 200 years ago, the US had 50 or so economic crises labeled panic, recession, depression, etc. and was involved in dozens of wars of all sizes. Mr. Keynes recognized this in a famous quote at Bretton Woods but even his counter cyclical remedies were unable to change things. There is no serious difference between Obama and Romney. Both are privy to Wall Street money and control. Both supported TARP and bank bailouts and mollycoddled the financial felons by tolerating their corruption and failing to prosecute their crimes. Both are on board supranational bodies who used neo liberal austerity policies in the the LDCs and are now used in the developed world.