Wednesday , April 24 2019
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Madness on both sides of the Atlantic

Summary:
Its Wednesday and some snippets only today. I was reviewing some data on public investment in the European Union the other day and up popped an article in Barrons that covered the same issue. The data reveals the stark failure of the Eurozone and the European Union, in general. The consequences of the European Union’s ideological obsession for rules over reality is now clearly undermining the future prosperity of the Member States. While the fiscal austerity has created elevated and persistent levels of mass unemployment, increased poverty rates, widening disparities between wealth and income, divergences in living standards across the Member States, what hasn’t been focused on much is the intergenerational consequences of the austerity. The data makes it clear that public investment in

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Its Wednesday and some snippets only today. I was reviewing some data on public investment in the European Union the other day and up popped an article in Barrons that covered the same issue. The data reveals the stark failure of the Eurozone and the European Union, in general. The consequences of the European Union’s ideological obsession for rules over reality is now clearly undermining the future prosperity of the Member States. While the fiscal austerity has created elevated and persistent levels of mass unemployment, increased poverty rates, widening disparities between wealth and income, divergences in living standards across the Member States, what hasn’t been focused on much is the intergenerational consequences of the austerity. The data makes it clear that public investment in infrastructure has ground to a halt and in many cases, nations are not even replacing existing capital as it wears out. The quality and quantity of public infrastructure in place is crucial for general material prosperity and the future productivity of nations. While starving such expenditure may not have political consequences in the short-run – and this is why the austerity is partially focusing on cuts to investment spending – over times as the extant infrastructure deteriorates the the nation and the future generations lose out badly. Just another day in Europe! And across the Atlantic, the Democrats are proposing a ‘Balanced Budget Amendment’ to the US constitution. Madness on both sides of the sea!

The stark failure of the Eurozone

The Europhile Left plot their latest idea to ‘reform’ the European Union and its most advanced expression – the Economic and Monetary Union (EMU), the fires continue to burn.

We often hear mainstream economists talk about the burden that governments are leaving the future generations. They usually mean public debt and their logic is flawed at the most elemental level.

If governments are funding schools, hospitals, public transport and building infrastructure that provides services into the future and crowds in non-government investment, then the benefits flow across generations.

But in the case of the Eurozone, the burden from an obsession with fiscal surpluses and an aversion to public debt, has actually resulted in a situation where future generations will be poorer than their forebears.

There was an article in Barrons last week (April 5, 2019) – Italy Embraces China, and Europe’s Elites Have Only Themselves to Blame – that was relevant to this issue.

The article is about China’s increasing investment influence in Italy, which is being criticised by the European Commission.

The Commission is scared to death of China’s plans to invest in infrastructure in Europe.

They claim it is “an affront to European security” (which it might be) and some observers “suggested giving the EU the power to block Chinese investments … to preserve Europe’s ‘autonomy and sovereignty'”.

Out they came – Germany’s foreign minister, the Dutch Prime Minister, the French President – all criticising Italy for signing a deal to accept Chinese investment in its ports.

Not only are these criticisms hypocritical given nations such as Luxembourg accept Chinese investment, but also signal the massive failure of the European Union (in particular the Eurozone) to act responsibly in terms of maintaining and expanding Europe’s public infrastructure.

Remember that the European Commission has been bullying Italy to push more quickly to fiscal surplus.

The obsession with fiscal austerity is now starting to have dire consequences for the future, in addition to the damage it has already caused in the present.

The following table shows average net public investment (gross investment minus depreciation) for the pre-crisis period (1995-2009) and the post-crisis period (2010-2017) as a proportion of GDP.

Gross investment is new public investment but some of that goes to replacing worn out capital (from previous investment). Net investment is thus the new net capital created by public investment spending.

If net investment is positive, then public capital stocks are rising and generating extra benefits.

If net investment is negative, then the nation is not even replacing its existing capital stock.

The figures are stark.

Prior to the crisis the Euro19 nations were investing (after replacing worn out capital) around 0.7 per cent of total GDP. In the post-crisis period that has fallen to 0.1 per cent of GDP.

Germany is investing just enough to replace its worn out capital.

Nations such as Greece, Italy, and Portugal have experienced a decline in their public capital stock since 2010, as a result of the austerity.

Madness on both sides of the Atlantic

Capital expenditure is easier to cut politically because it takes a while before the negative effects start revealing themselves.

Buildings eventually deteriorate, bridges become unsafe, skills diminish etc.

But, by the time the manifestations become evident, it is much more expensive to remedy the degradation.

It is a myopic strategy.

Please read the following blog posts (among others for more information):

1. The mindless and myopic nature of neoliberalism (January 9, 2019).

2. Infrastructure report for the US – dire degradation of public infrastructure (December 18, 2017).

3. British floods demonstrate the myopia of fiscal austerity (January 4, 2016).

4. Public R&D austerity spending cuts undermine our grandchildren’s future (October 21, 2015).

5. Germany should look at itself in the mirror (June 17, 2015).

6. The myopia of fiscal austerity (June 10, 2015).

The Barron’s article produced the following graph which shows the decline in public investment in another way.

Madness on both sides of the Atlantic

The article tells us that:

Net investment in those countries, and in Europe as a whole, has been roughly zero ever since. Nearly the entire decline in European public investment can be explained by the contraction in the crisis countries. It is unsurprising they have been eager recipients of Chinese capital.

Why would any nation want to be a member of this cabal?

Certainly, the children of Europe will suffer from the consequences of this ideological obsession for rules over reality.

Balanced Budget Amendment

The – Blue Dog Coalition – within the US Democratic Party are obsessed with fiscal deficits – in a bad way.

Their latest stunt is courtesy of the on Democrat representative for Utah – Ben McAdams – who submitted a proposal for a ‘Balanced Budget Amendment’ to the US Constitution to force the federal government to cover its spending with tax and other revenue.

McAdams told Bloomberg that:

Both parties have behaved in a way that is fiscally irresponsible … The day of reckoning is coming … In my district, fiscal responsibility matters. People live within their means and they are responsible with the decisions that they make, and we expect the same from our federal government.

One hopes that the reckoning is when he loses his seat in the Congress.

The interesting aspect of this latest attempt (of many failed previous efforts) is that it is the Democrats that have put it forward, while Donald Trump makes a mockery of his Republican Congressional colleagues with his fiscal activism.

The latter is causing internal strife within the Republicans. The former will further split the Democrats.

Let’s hope the emerging progressive wing holds its ground against these fiscal illiterates.

Publishing trivia

I received a promotional E-mail from Macmillan the other day. They are the publishers of our new textbook – Macroeconomics – ignore the “not yet published” note on the site).

The first three entries in their promotional material were:

Madness on both sides of the Atlantic

Madness on both sides of the Atlantic

Madness on both sides of the Atlantic

The promotion came out about the same time Paul Krugman went crazy about Modern Monetary Theory (MMT).

Conspiracy theorists would suggest he might have been trying to protect his place in the market.

Anyway, this is the biggest textbook publishing house around for economics and it is great to be in their catalogue.

Morning Music …

This was one of the earliest albums I ever bought as a teenager – the 1969 self-titled, second album from one of the best guitar players ever – Johnny Winter.

And this was always my favourite song – I’m Yours And I’m Hers – first track on the album, written by Johnny Winter himself.

It was recorded at the Warehouse in Nashville in early 1969.

Johnny Winter was signed by Columbia after they heard him jamming with Mike Bloomfield at the famous Fillmore East in New York in late 1968.

To record the album, the Columbia studio musicians Uncle John Turner (drums) and Tommy Shannon (bass) were assembled as the mainstay band with several very famous guests (including Willie Dixon and Big Walter Horton).

Shannon and Turner stayed on as the Johnny Winter band once he started touring and what a band that proved to be.

The only thing I never liked about Johnny Winter was his choice of a Gibson Firebird guitar – which I never thought were much chop.

But he certainly made them sing.

I was very impressed when the Rolling Stones opened their Hyde Park concert with this song on July 5, 1969 as a dedication to Brian Jones who had died 2 days earlier.

While the version is nowhere near as good as the original it certainly was a great dedication and introduced new member Mick Taylor on guitar, who I always thought made was part of the best Stones lineup.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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