Beyond Austerity
In my column this week for Defining Ideas, I argue that the key to economic recovery is liberalizing labor markets, not relying on macroeconomic “fixes.”
Grim is the right word to describe the latest economic news from both the European Union and the United States. Throughout the European Union, austerity programs have failed both politically and economically. In Spain, unemployment rates have soared above 24 percent. The Dutch government is on the edge of collapse because of the popular and political unwillingness to accept the austerity program proposed by its conservative government. Romania is not far behind. Greece, Italy, and Portugal remain in perilous condition. France faces a presidential run-off election between President Nicholas Sarkozy, who is moving rightward on immigration issues, and the free-spending socialist candidate Franciose Hollande. On the American front, the decline of GDP growth to 2.2 percent rightly raises fears that our sputtering domestic recovery is just about over.
It is no surprise, therefore, that leading columnists like Paul Krugman have taken this opportunity to announce triumphantly that austerity is a “fairy tale” that shatters the social confidence that it is designed to shore up. It is futile to invoke fiscal austerity, he argues, when economically beleaguered countries really need to be “spending more to offset falling private demand.” The cure is supposed to be increased government spending, but that solution has its own serious problems. Krugman assumes that the declines in private demand and private investment are attributable to mysterious external forces that are beyond the power of government to control.
But both macroeconomic programs are doomed to failure. Only by changing our microeconomic policy—reforming the labor market, specifically—will we start seeing economic growth. The calcification of labor markets with regulation upon regulation is the primary impediment to economic recovery today, as I explain further over at Defining Ideas.
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Oct '10
Re: Beyond Austerity
Our growth is limited by the growth of our trading partners. This has to do with the trade deficit--as a practical matter, the only way to shrink a trade deficit is to grow somewhat slower than your trading partners. This has been well-known in policy circles for close to a century. At the moment Europe is dragging us down, though emerging markets are doing much better and are taking up some of the slack.
Labor market reforms can help speed this process, but are politically difficult to do.
Mar '11
Re: Beyond Austerity
This reminds me of a recent ordeal we've had with putting in a fire alarm system in our business. The regulations are such that we to put in horns and strobes for ADA reasons in every single possible location where a person could be, many many smoke and heat detectors, and have the exact placement of all of these devices subject to the approval of the fire inspector.
The result was a system that, according to one alarm company, would have cost over $10K to put in.
So, by regulatory logic, it was better that my facility burn to the ground than to have a system that was not ADA compliant.