Cart (0)
business newsScore One for the Keynesians
By
Jarad Vary
Feb 07, 2012 10:55 am
Obama's policies are slowly pulling the US economy back to health, while austerity programs in Europe have helped mire the continent in recession.
PRINT
 |
|
First, in Athens, controversy erupted over the demand by EU, ECB and IMF representatives for renewed Greek austerity measures. Negotiations to save Greece from a disorderly default are now teetering on knife’s edge.
Meanwhile, here at home, the US Department of Labor reported surprisingly strong job growth for the month of January, with headline unemployment falling to 8.3%, the lowest of President Barack Obama’s presidency.
Although they appear unrelated, these stories are in fact two sides of the same coin. While President Obama’s Keynesian prescriptions are slowly pulling the US economy back to health, austerity programs in Europe have helped mire the continent in recession.
Score one for the Keynesians! But first, some background.
In Athens, the Financial Times is the latest to report that Greece will default unless its leaders can negotiate a bailout deal with its creditors before March. According to terms currently under discussion, private lenders would accept a roughly 75% haircut to the value of their Greek bonds, which would reduce Greece’s debt burden. The IMF and the EU would pitch in, loaning upwards of €130bn to the government. In exchange, Greek politicians would impose public sector job cuts and a substantial decrease in the minimum wage, among other hardships.
But Greek politicians are digging in their heels, the FT reports: “All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default.” (At this hour, Bloomberg is reporting that Greek officials have indeed come to an agreement on fiscal reforms, though the new deal will still require approval by the Greek parliament.)
Jacob Funk Kirkegaard, of the Peterson Institute, assures me that Greek leaders will eventually get with the program. Still, the recalcitrance of the politicians is hardly baseless. So far, economic growth under austerity has been much weaker than the EU, ECB and IMF initially predicted. To make up the gap, Greece has required a succession of patchwork bailouts. Poul Thomsen, chief IMF official in Greece, admitted Wednesday that fiscal consolidation has been harmful, and the IMF now predicts that Greek GDP will contract by another 3% in 2012.
If it was a dark day for Greece, can it be morning in America? (Yes it can!) The US private sector added 243,000 nonfarm jobs last month, beating economists’ expectations for the second month in a row. The good news sent the Dow Jones Industrial Average (^DJI) to 12,862.23 on Friday, its highest close since May 2008.
Now, despite a lousy third quarter of 2011, the US looks to have avoided the danger of a double dip recession, and has even experienced several consecutive months of respectable job growth. If this is a recovery, some of the credit goes to Obama’s Keynes-inspired economic policies, including the American Recovery and Reinvestment Act (the much-maligned stimulus), and the December 2010 payroll tax cut.
To be sure, the Obama administration shouldn’t start popping the champagne just yet—quarterly GDP growth remains weak, and as Matt Yglesias points out, at this rate the US economy is unlikely to reach full employment in this decade. But the champions of budget austerity have even less to celebrate. Euro nations including Spain, Portugal, Ireland, France, Germany and Italy have all aggressively pursued austerity. Now, the eurozone faces a year of negative growth and record-high unemployment. And then there is Greece, where unemployment reached 18.2% in October. There is little question whose economic policies are working better.
But not everyone is getting the message. Just last week, Financial Times columnist Sebastian Mallaby had some dubious advice for Mitt Romney. He urged Romney to refocus his presidential campaign and “declare war” on government debt. If Romney adopts Mallaby’s suggestion and attacks Obama for his Keynesian policies, Obama should point to Greece—and say, “Bring it on.”
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
