Thursday, February 3, 2011

Economy Gaining Speed - Unemployment Up

Or so says the Reuters headline. I know everyone is on the Egypt situation 24/7, but with unemployment again rising, despite economic output increasing, I want to keep the focus on the economy. Unemployment is again at 9.8%. The Administration itself has never addressed the unemployment issue other than to make things worse through deficit spending. Meanwhile, Paul Krugman continues to call for deficit spending and loose money.

Krugman also takes conservatives and Paul Ryan to task for misreading the situation in England and Ireland.
On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation’s Index of Economic Freedom ranked it above every other Western nation. In 2006, George Osborne, now Britain’s chancellor of the Exchequer, declared Ireland “a shining example of the art of the possible in long-term economic policy making.” And the truth was that in 2006-2007 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.
Krugman is in fact correct. Here is what Paul Ryan had said:
Just take a look at what's happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn't act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.
Krugman lays the blame on Irish banks.
So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.
I agree that the Irish went through a property bubble that collapsed. But he fails to account for the government policy that was significantly to blame. At exactly the wrong moment, the government stepped in to save the banks by guaranteeing bank deposits. From a U.K. Telegraph article in September 2008:

Ireland's government said it will guarantee Irish banks' deposits and debts for two years, seeking to calm investor concern after banking shares fell 26pc in Dublin.

The government said it will safeguard all deposits at six financial institutions in response to turmoil in financial markets.

Predictably the bad debts of the banks were offloaded on to the Irish government, wrecking its finances.

So the real lesson is that the government needs to distance itself from guarantees to banks and exposing itself to the risk in property bubbles. Time to unwind and privatize Fannie Mae, whose purpose was to lift home ownership to above market percentages. Property bubbles driven by bad government policy seem to be at the root of both Irish and U.S. economic hard times.

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