Hillary’s Threat to Wage Continuous War on the Working Class via Austerity Proved Fatal

By William K. Black

Cross-posted at New Economic Perspectives.

I’ve come back recently from Kilkenny, Ireland where I participated in the seventh annual Kilkenomics – a festival of economics and comedy.  The festival is noted for people from a broad range of economic perspectives presenting their economic views in plain, blunt English.  Kilkenomics VII began two days after the U.S. election, so we added some sessions on President-elect Trump’s fiscal policy views.  Trump had no obvious supporters among this diverse group of economists, so the audience was surprised to hear many economists from multiple nations take the view that his stated fiscal policies could be desirable for the U.S. – and the global economy, particularly the EU.  We all expressed the caution that no one could know whether Trump would seek to implement the fiscal policies on which he campaigned.  Most of us, however, said that if he wished to implement those policies House Speaker Paul Ryan would not be able to block him.  I opined that congressional Republicans would rediscover their love of pork and logrolling if Trump implemented his promised fiscal policies.

The audience was also surprised to hear two groups of economists explain that Hillary Clinton’s fiscal policies remained pure New Democrat (austerity forever) even as the economic illiteracy of those policies became even clearer – and even as the political idiocy of her fiscal policies became glaringly obvious.  Austerity is one of the fundamental ways in which the system is rigged against the working class.  Austerity was the weapon of mass destruction unleashed in the New Democrats’ and Republicans’ long war on the working class.  The fact that she intensified and highlighted her intent to inflict continuous austerity on the working class as the election neared represented an unforced error of major proportions.  As the polling data showed her losing the white working class by staggering amounts, in the last month of the election, the big new idea that Hillary pushed repeatedly was a promise that if she were elected she would inflict continuous austerity on the economy.  “I am not going to add a penny to the national debt.”

The biggest losers of such continued austerity would as ever be the working class.  She also famously insulted the working class as “deplorables.”  It was a bizarre approach by a politician to the plight of tens of millions of Americans who were victims of the New Democrats’ and the Republicans’ trade and austerity policies.  As we presented these facts to a European audience we realized that in attempting to answer the question of what Trump’s promised fiscal policies would mean if implemented we were also explaining one of the most important reasons that Hillary Clinton lost the white working class by such an enormous margin.

Readers of New Economic Perspectives understand why UMKC academics and non-academic supporters have long shown that austerity is typically a self-destructive policy brought on by a failure to understand how money works, particularly in a nation like the U.S. with a sovereign currency.  We have long argued that the working class is the primary victim of austerity and that austerity is a leading cause of catastrophic levels of inequality.  Understanding sovereign money is critical also to understanding why the federal government can and should serve as a job guarantor of last resort.  People, particularly working class men, need jobs, not simply incomes to feel like successful adults.  The federal jobs guarantee program is not simply economically brilliant it is politically brilliant, it would produce enormous political support from the working class for whatever political party implemented it.

At Kilkenomics we also used Hillary’s devotion to inflicting continuous austerity on the working class to explain to a European audience how dysfunctional her enablers in the media and her campaign became.  The fact that Paul Krugman was so deeply in her pocket by the time she tripled down on austerity that he did not call her out on why austerity was terrible economics and terrible policy shows us the high cost of ceasing to speak truth to power.  The fact that no Clinton economic adviser had the clout and courage to take her aside and get her to abandon her threat to inflict further austerity on the working class tells us how dysfunctional her campaign team became.  I stress again that Tom Frank has been warning the Democratic Party for over a decade that the policies and the anti-union and anti-working class attitudes of the New Democrats were causing enormous harm to the working class and enraging it.  But anyone who listened to Tom Frank’s warnings was persona non grata in Hillary’s campaign.  In my second column in this series I explain that Krugman gave up trying to wean Hillary Clinton from her embrace of austerity’s war on the working class and show that he remains infected by a failure to understand the nature of sovereign currencies.

What the economists were saying about Trump at Kilkenomics was that there were very few reliable engines of global growth.  China’s statistics are a mess and its governing party’s real views of the state of the economy are opaque.  Japan just had a good growth uptick, but it has been unable to sustain strong growth for over two decades.  Germany refuses, despite the obvious “win-win” option of spending heavily on its infrastructure needs to do so.  Instead, it persists in running trade and budget surpluses that beggar its neighbors.  England is too small and only Corbyn’s branch of Labour and the SNP oppose austerity.  “New Labour” supporters, most of the leadership of the Labour party, like the U.S. “New Democrats” that served as their ideological model, remain fierce austerity hawks.

That brings us to what would have happened if America’s first family of “New Democrats” – the Clintons – had won the election.  The extent to which the New Democrats embraced the Republican doctrine of austerity became painfully obvious under President Obama.  Robert Rubin dominated economic policy under President Clinton.  The Clinton/Gore administration was absolutely dedicated toward austerity.  The administration was the lucky beneficiary of the two massive modern U.S. bubbles – tech stocks and housing – that eventually produced high employment.  Indeed, when the tech bubble popped the economy was saved by the hyper-inflation of the housing bubble.  The housing bubble collapsed on the next administration’s watch, allowing the Clintons and Rubinites to spread the false narrative that their policies produced superb economic results.

When we think of the start of the Obama administration, we think of the stimulus package.  In one sense this is obvious.  The only economically literate response to a Great Recession is massive fiscal stimulus.  When Republicans control the government and confront a recession they always respond with fiscal stimulus in the modern era.  Obama’s stimulus plan was not massive, but it sounded like a large number to the public.  Two questions arise about the stimulus plan.  Why was Obama willing to implement it given his and Rubin’s hostility to stimulus?  Conversely, why, given the great success of the stimulus plan, did Obama abandon stimulus within months?

Rubin and his protégés had a near monopoly on filling the role of President Obama’s key economic advisors.  Larry Summers is a Rubinite, but he is infamous for his ego and he is a real economist from an extended family of economists.  Summers was certain in his (self-described) role as the President’s principal economic adviser to support a vigorous program of fiscal stimulus because the Obama administration had inherited the Great Recession.  Summers knew that any other policy constituted economics malpractice.  Christina Romer, as Chair of the President’s Council of Economic Advisers and Jared Bernstein, Vice President Biden’s chief economist, were both real economists who strongly supported the need for a powerful program of fiscal stimulus.  Each of these economists warned President Obama that his stimulus package was far too small relative to the massive depths of the Great Recession.

Rubin’s training was as a lawyer, not as an economist, so Summers was not about to look to Rubin for economic advice.  In fairness to Rubin, he was rarely so stupid as to reject stimulus as the appropriate initial response to a recession.  He supported President Bush’s 2001 stimulus package in response to a far milder recession and President Obama’s 2009 stimulus package.  Rubin does not deserve much fairness.  By early 2010, while Rubin admitted that stimulus is typically the proper response to a recession and that the 2009 stimulus package was successful, he opposed adding to the stimulus package in 2010 even though he knew that Obama’s 2009 stimulus package was, for political reasons, far smaller than the administration’s economists knew was needed.

Here’s ex-Treasury Secretary Robert Rubin–one of the chief architects of the global financial crisis–articulating the position of his proteges at 1600 Pennsylvania Ave.

Robert Rubin: “Putting another major stimulus on top of already huge deficits and rising debt-to-GDP ratios would have risks. And further expansion of the Federal Reserve Board’s balance sheet could create significant problems…. Today’s economic conditions would ordinarily be met with expansionary policy, but our fiscal and monetary conditions are a serious constraint, and waiting too long to address them could cause a new crisis….

In the spirit of Kilkenomics, we were blunt about the austerity assault that Rubin successfully argued Obama should resume against America’s working class beginning in early 2010.  It was inevitable that it would weaken and delay the recovery.  Tens of millions of Americans would leave the labor force or remain underemployed and even underemployed for a decade.  The working class would bear the great brunt of this loss.  In modern America this kind of loss of working class jobs is associated with mental depression, silent rage, meth, heroin, and the inability of working class males and females to find a marriage partner, and marital problems.  It is a prescription for inflicting agony – and it is a toxic act of politics.

Prior to becoming a de facto surrogate for Hillary and ceasing to speak truth to her and to America, Paul Krugman captured the gap between the Obama administration’s perspective and that of most of the public.

According to the independent committee that officially determines such things, the so-called Great Recession ended in June 2009, around the same time that the acute phase of the financial crisis ended. Most Americans, however, disagree. In a March 2014 poll, for example, 57 percent of respondents declared that the nation was still in recession.

The type of elite Democrats that the New Democrats idealized – the officers from big finance, Hollywood, and high tech – recovered first and their recovery was a roaring success.  Obama, and eventually Hillary, adopted the mantra that America was already great.  Our unemployment rates, relative to the EU nations forced to inflict austerity on their economies, is much lower.  But the Obama/Hillary mantra was a lie for scores of millions of American workers, including virtually all of the working class and much of the middle class.  As Hillary repeated the mantra they concluded that she was clueless about and indifferent to their suffering.  As we emphasized in Kilkenny, Obama and Hillary were not simply talking economic nonsense, they were committing political self-mutilation.

Krugman used to make this point forcefully.

[T]he American Recovery and Reinvestment Act, aka the Obama stimulus … surely helped end the economy’s free fall. But the stimulus was too small and too short-lived given the depth of the slump: stimulus spending peaked at 1.6 percent of GDP in early 2010 and dropped rapidly thereafter, giving way to a regime of destructive fiscal austerity. And the administration’s efforts to help homeowners were so ineffectual as to be risible.

Timothy Geithner, a proponent of austerity, is famous for remarking that he only took only one economics class – and did not understand it.  In the same review of Geithner’s book by Krugman that I have been quoting, Krugman gives a concise summary of Geithner’s repeated lies about his supposed support for a larger stimulus.  Jacob Lew, the Rubinite who Obama chose as Geithner’s successor as Treasury Secretary, was also trained as a lawyer and is equally fanatic in favoring austerity.  In 2009, no one with any credibility in economics within the Obama administration could serve as an effective spokesperson for austerity as the ideal response to the Great Recession.

But Romer, Summers, and Bernstein experienced the same frustration as 2009 proceeded.  The problem was not simply the Rubinites’ fervor for the self-inflicted wound of austerity – the fundamental problem was President Obama.  Obama’s administration was littered with Rubinites because Obama was a New Democrat who believed that Rubin’s love of austerity and trade deals was an excellent policy.  Of course, he had campaigned on the opposite policy positions, but that was simply political and Obama promptly abandoned those campaign promises.  Fiscal stimulus ceased to be an administration priority as soon as the stimulus bill was enacted.  Romer and Summers recognized the obvious and soon made clear that they were leaving.  Bernstein retained Biden’s support, but he was frozen out of influence on administration fiscal policies by the Rubinites.

By 2010, the fiscal stimulus package had begun to accelerate the U.S. recovery.  Romer left the administration in late summer 2010.  Summers left at the end of 2010.  Bill Daley (also trained as a lawyer) became Obama’s chief of staff in early 2011.  Timothy Geithner, and finally Jacob Lew dominated Obama administration fiscal policy from late 2010 to the end of the administration in alliance with Daley and other Rubinite economists.  It may be important to point out the obvious – Obama chose to make each of these appointments and there is every reason to believe that he appointed them because he generally shared their views on austerity.  In the first 60 days of his presidency he went before a Congressional group of New Democrats and told them “I am a New Democrat.”

Obama began pushing for the fiscal “grand bargain” in 2010.  The “grand bargain” would have pushed towards austerity and begun unraveling the safety net.  As such, it was actually the grand betrayal.  Obama’s administration began telling the press that Obama viewed achieving such a deal with the Republicans critical to his “legacy.”  There were two major ironies involving the grand bargain.  Had it been adopted it would have thrown the U.S. back into recession, made Obama a one-term president, and led to even more severe losses for the Democratic Party in Congress and at the state level.  The other irony was that it was the Tea Party that saved Obama from Obama’s grand betrayal by continually demanding that Obama agree to inflict more severe assaults on the safety net.

Obama adopted Lew’s famous, economically illiterate line and featured it is in his State of the Union Address as early as January 2010.  What follows is a lengthy quotation from that address.  I have put my critiques in italics after several paragraphs.  Obama’s switch from stimulus to austerity was Obama’s most important policy initiative in his January 2010 State of the Union Address.

The White House

Office of the Press Secretary

For Immediate Release

January 27, 2010

Remarks by the President in State of the Union Address

Now — just stating the facts.  Now, if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit.  But we took office amid a crisis.  And our efforts to prevent a second depression have added another $1 trillion to our national debt.  That, too, is a fact.

Why would Obama normally have been thrilled to “start bringing down the deficit?”  A budget deficit by a nation with a sovereign currency such as the U.S. is normal statistically and typically desirable when we have a negative balance of trade.  No, it is not a “fact” that stimulus “added another $1 trillion to our national debt.”  Had we not adopted a stimulus program the debt would have grown even larger as our economy fell even more deeply into the Great Recession.

I’m absolutely convinced that was the right thing to do.  But families across the country are tightening their belts and making tough decisions.  The federal government should do the same.  (Applause.)  So tonight, I’m proposing specific steps to pay for the trillion dollars that it took to rescue the economy last year.

Obama admits that stimulus was desirable.  He knows that his economists believed that if the stimulus had been larger and lasted longer it would have substantially speeded the recovery.  One of the most important reasons why dramatically increased government fiscal spending (stimulus) is essential in response to a Great Recession is that the logical and typical consumer response to such a downturn is for “families across the country” to “tighten their belts” by reducing spending.  That reduces already inadequate demand, which leads to prolonged downturns.  Economists have long recognized that it is essential for the government to do the opposite when consumers “tighten their belts” by greatly increasing spending.  To claim that it is “common sense” to “do the same” – exacerbate the inadequate demand – because it is a “tough decision” makes a mockery of logic and economics.  It is a statement of economic illiteracy leading to a set of policy decisions sure to harm the economy and the Democratic Party.  In particular, it guaranteed a nightmare for the working class.

No, no, no.  I can feel the pain of my colleagues that are scholars in modern monetary theory (MMT).  The U.S. has a sovereign currency.  We can “pay” a trillion dollar debt by issuing a trillion dollars via keystrokes by the Fed.  What Obama meant was that he would propose (over time) to increase taxes and reduce federal spending by one trillion dollars.  Such an austerity plan would harm the recovery and reduce important government services.  Again, the working class were sure to be the primary victims of Obama’s self-inflicted austerity.

Starting in 2011, we are prepared to freeze government spending for three years.  (Applause.)  Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected.  But all other discretionary government programs will.  Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.  And if I have to enforce this discipline by veto, I will.  (Applause.)

First, the metaphor is economically illiterate and harmful.  A government with a sovereign currency is not a “cash-strapped family.”  It is not, in any meaningful way, “like” a “cash-strapped family.”  Indeed, the metaphor logically implies the opposite – that it is essential that because the government is not like a “cash-strapped family” only it can spend in a counter-cyclical fashion (stimulus) to counter the perverse effect of “cash-strapped famil[ies]” cutting back their spending due to the Great Recession.

Let’s take this slow.  In a recession, consumer demand is grossly inadequate so firms fire workers and unemployment increases.  We need to increase effective demand.  As a recession hits and workers see their friends fired or reduced to part-time work, a common reaction is for workers to reduce their debts, which requires them to reduce consumption.  Consumer consumption is the most important factor driving demand, so this effect, which economists call the paradox of thrift, can deepen the recession.  Workers are indeed cash-strapped.  Governments with sovereign currencies are, by definition, not cash-strapped.  They can and should engage in extremely large stimulus in order to raise effective demand and prevent the recession from deepening.  Workers will tend to reduce their spending in a pro-cyclical fashion that makes the recession more severe.  Only the government can spend in a counter-cyclical fashion that will make the recession less severe and lengthy.

We will continue to go through the budget, line by line, page by page, to eliminate programs that we can’t afford and don’t work.  We’ve already identified $20 billion in savings for next year.  To help working families, we’ll extend our middle-class tax cuts.  But at a time of record deficits, we will not continue tax cuts for oil companies, for investment fund managers, and for those making over $250,000 a year.  We just can’t afford it.  (Applause.)

Now, even after paying for what we spent on my watch, we’ll still face the massive deficit we had when I took office.  More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket.  That’s why I’ve called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad.  (Applause.)  This can’t be one of those Washington gimmicks that lets us pretend we solved a problem.  The commission will have to provide a specific set of solutions by a certain deadline.

The Democrats have to stop attacking Republicans for running federal budget deficits.  I know it’s political fun and that the Republicans are hypocritical about budget deficits.  Deficits are going to be “massive” when an economy the size of the U.S. suffers a Great Recession.  We have had plenty of “massive” deficits during our history under multiple political parties.  None of this has ever led to a U.S. crisis.  We have had some of our strongest growth while running “massive” deficits.  Conversely, whenever we have adopted severe austerity we have soon suffered a recession.  In 1937, when FDR listened to his inept economists and inflicted austerity, the strong recovery from the Great Depression was destroyed and the economy was thrust back into an intense Great Depression.

As to the debt “commission” to solve our “debt crisis,” it was inevitable that such a commission would be dominated by Pete Peterson protégés and that they would demand austerity and an assault on the federal safety net.  That would be a terrible response to the Great Recession and the primary victims of the commission’s policies would be the working class.

Now, yesterday, the Senate blocked a bill that would have created this commission.  So I’ll issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans.  (Applause.)  And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason for why we had record surpluses in the 1990s.  (Applause.)

For a nation with a sovereign currency, there is nothing good about the “record surpluses in the 1990s.”  Such substantial surpluses have occurred roughly nine times in U.S. history and each has been followed shortly by a depression or the Great Recession.  This does not prove causality, but it certainly recommends caution.  Similarly, “pay-as-you-go” has been the bane of Democratic Party efforts to help the American people.  Only a New Democrat like Obama would call for the return of the anti-working class “pay-as-you-go” rules.

Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting.  And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger.  That’s how budgeting works.  (Laughter and applause.)  But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.

No.  It wouldn’t have damaged our markets, increased interest rates or jeopardized our recovery.  We had just run an empirical experiment in contrast to the Eurozone.  Stimulus greatly enhanced our recovery, while interest rates were at historical lows, and led to surging financial markets.  Austerity had done the opposite in the eurozone.

From some on the right, I expect we’ll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that’s what we did for eight years.  (Applause.)  That’s what helped us into this crisis.  It’s what helped lead to these deficits.  We can’t do it again.

Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new.  Let’s invest in our people without leaving them a mountain of debt.  Let’s meet our responsibility to the citizens who sent us here.  Let’s try common sense.  (Laughter.)  A novel concept.

Let’s try actual common sense instead of metaphors that are economically illiterate.  Let’s try real economics.  Let’s stop talking about “mountains of debt” as if they represented a crisis for the U.S. and stop ignoring the tens of millions of working class Americans and Europeans whose lives and families were treated as austerity’s collateral damage and were not even worth discussing in Obama’s ode to the economic malpractice of austerity.  Austerity is the old tired battle that we repeat endlessly to the recurrent cost of the working class.

Trump is not Locked into Austerity

I note the same caution we gave in Ireland – we don’t know whether President Trump will seek to implement his economic proposals.  Trump has proposed trillions of dollars in increased spending on infrastructure and defense and large cuts in corporate taxation.  In combination, this would produce considerable fiscal stimulus for several years.  The point we made in Ireland is that if he seeks to implement his proposals (a) we believe he would succeed politically in enacting them and (b) they would produce stimulus that would have a positive effect on the near and mid-term economy of the U.S.  Further, because the eurozone is locked into a political trap in which there seems no realistic path to abandoning the self-inflicted wound of continuous austerity, Trump represents the eurozone’s most realistic hope for stimulus.

Final Cautions

Each of the economists speaking on these subjects in Kilkenny opposed Trumps election and believe it will harm the public.  Fiscal stimulus is critical, but it is only one element of macroeconomics and no one was comfortable with Trump’s long-term control of the economy.  I opined, for example, that Trump will create an exceptionally criminogenic environment that will produce epidemics of control fraud.  The challenge for progressive Democrats and independents is to break with the New Democrats’ dogmas.  Neither America nor the Democratic Party can continue to bear the terrible cost of this unforced error of economics, politics, and basic humanity.  I fear that the professional Democrats assigned the task of re-winning the support of the white working class do not even have ending the New Democrats’ addiction to austerity on their radar.  They are probably still forbidden to read Tom Frank.

Eurozone Stagnation: Wrong diagnosis, wrong medicine, no recovery


By John Weeks

What the EC Doctors Said

If a doctor misdiagnoses a patient’s malady and prescribes an inappropriate medicine, we would not expect recovery to good health.  Should the doctor persist in the faulty diagnosis and prescribe further doses of the wrong medicine, the wise patient seeks a second opinion.  As evidenced by the experience of Greece last year, it is the misfortune of the residents of the eurozone that second opinions are not allowed.

In the early years of this decade the European Commission, fronting for governments powerful members, diagnosed eurozone members as suffering from lack of competitiveness in international trade.  The medicine implied by this diagnosis, controversial from the outset, included fiscal “consolidation” and “structural reforms”.

The first of these, summarized in the word “austerity”, dictated expenditure reduction and tax increases to reduce fiscal deficits.  The diagnosis implied emphasis on the former, because social expenditures allegedly harm competitiveness, as would higher taxes.  The most important “structural reforms”, vague enough to cover all policies to make policies more pro-business, involved reduction in worker and trade union rights, especially collective bargaining.

Governments of the putatively “uncompetitive” countries were lectured that obedience to the Commission’s prescriptions would eliminate efficiency-undermining maladies by “down-sizing” the public sector and directly reducing the production costs constraining wage growth.  In a more enlightened era this diagnosis and prescription would have been described as “mercantilist”, selecting government policies with the explicit goal of a trade surplus.

Ambiguous Fiscal “Consolidation”

The chart below shows that the Commission-fronted fiscal policies were associated with a decline in public sector deficits.  Fiscal deficits bottomed out in late 2009 (France, Italy and Spain) and late 2010 (Germany).  On average the Euro 15 (the foregoing four plus others adopting the euro in 2000-2001) reached its lowest point in early 2010 and subsequently rose.  Was this a success of austerity policies?

Dating the beginning of austerity policies involves considerable subjectivity.  As a programme implemented across the eurozone 2011 seems an appropriate date.  On the basis of when governments adopted European Commission approved austerity packages the BBC suggests late 2011 or early 2012.  If we accept this dating, the onset of deficit reduction preceded austerity policies by at least a year except for Spain.

Scepticism about the effectiveness of the EC prescription for deficit reduction increases by comparing the terminal years in the chart.  Though the German fiscal balance rose into surplus, after eight years France and Spain remained slightly below their 2008 values.   The Italian government achieved a very marginal deficit reduction (-2.7 to -2.5), and the contraction of the deficit for the Euro 15 disappears if we exclude Germany.

Overall Fiscal Balance Share of GDP, Euro 15, France, Germany, Italy & Spain, Quarterly 2008-2016 (4 quarter moving average)


Source: Eurostat

Notes: Euro 15 is an EU category includes those eurozone members from 2001.


Mercantilism in Real time

Current account statistics provide more favourable results for the EC diagnosis and prescription (see chart below).  The German current account balance increased to over 8% of GDP in 2016, which according to the FT “boosted” the government’s popularity.  In Spain a deficit of almost -9% of GDP changed to a small surplus (net reversal of ten percentage points), with a less dramatic but strong shift in Italy from about -3% to +2%.  The French current account increased slightly (briefly positive), and all Euro 15 countries showed increases except Belgium and Luxemburg.

When assessing success in generating current account surpluses one must keep in mind that a decline in a country’s trade deficit implies a fall in domestic expenditure.  The most common form this takes is a decline in household consumption.  The striking case among the larger countries is Spain.

In 2008 Spanish per capita income was €24,400 and in 2016 will be slightly lower at 23,740.  Had it remained the same share of GDP, household consumption would have fallen by about 2.5% over the eight years.  Because of the large shift in the trade balance, private consumption per capita in 2016 was almost ten percent lower than in 2008.  In Ireland, one of the Euro 15, the trade surplus shifted by a massive 30 percentage points, leaving household consumption in 2016 almost 25% below its 2008 level.

These numbers demonstrate what until recently was a consensus across the economics profession – generating trade surpluses reduces the welfare of a population and in extreme cases impoverishes households.  This is especially the case when a surplus derive from depressing wages and output.

In itself a trade deficit need not bee a problem because short or long term money inflows can finance it.  Many countries, including EU members, have sustained trade deficits for extended periods, Britain being most obvious case.  A trade deficit does not necessarily indicate “lack of competitiveness” however defined.  In general it is not a problem that requires policy action even within a currency union.

Current Account Balance Share of GDP, Euro 15, France, Germany, Italy & Spain, Quarterly 2008-2016 (4 quarter moving average)


Source: OECD

Note: numbers in legend average for entire period.

Was It All Worth It?

A recent article in the Financial Times cites the dubious Markit indices to tell the reader that the eurozone recovery has “weathered the shock” of the British vote to leave the European Union.  I stress “dubious” because the PMI for Germany showed an increase while the Munich-based Ifo index reported a drop in “business confidence”.

Considerably more informative than these methodologically problematical attempts to capture subjective sentiments is that the FT considered annual growth rates less than 2% to qualify as “recovery”.  This is a textbook case of redefining failure as success.  Productivity growth plus growth of the labour force represents the lower limit to the potential growth rate when a country’s economy operates near full capacity.  When below full capacity, the case for all eurozone countries with the possible exception of Germany, growth rates can rise considerably above this.

Across the eurozone countries private sector labour productivity growth slowed after the financial crisis of 2008-2010, but was well above one percent annually.  This number implies that taken together the eurozone countries must growth at least by 1.5% to prevent a rise in unemployment.  As the chart below shows, since 2012 only the Spanish economy sustained an annual rate of growth substantially above 1.5%.

Over the four quarters through June 2016 the German and French economies grew at rates just sufficient to prevent unemployment increasing, while the Italian rate fell far short.  On average across the eurozone GDP expansion was insufficient to lower the unemployment rate.  No rational person would call this “slow recovery”.  It is stagnation.

Annualized GDP Growth Rates Euro 15, France, Germany, Italy & Spain, Quarterly 2008-2016 (4 quarter moving average)


Source: OECD

Note: numbers in legend average for entire period.

Fiscal deficits have fallen across the eurozone and most countries have passed from current account deficits to surpluses.  So slow has been progress on the former that the hypothesis cannot be rejected that initially larger deficits due to fiscal stimulus would have brought deficits down faster.  Similarly, the current account surpluses in most countries may reflect depressed domestic demand rather than greater competitiveness.

The German Chancellor described the British referendum result a “deep break in European history”.  At the meeting in Bratislava in mid-September she will face a range of complains and challenges, many of which have their source in the region’s economic stagnation.  One can speculate about the political health of the EU had she and her finance minister spent the last six years stimulating the European economies rather than “consolidating” and “reforming”.