Response to Precision German Engineering

(See: Just Above Sunset: "Precision German Engineering")

I like the way that 51-year old Berliner, Martin Glaser, thinks:

“A Europe which is ruled by Germany in this way is not the democratic Europe that I would like to have.”

Back when Europeans, partly in hopes of heading off the tendency of European nations to go to war with one another, first considered uniting them under a huge trade agreement, they explained to outsiders that this new European Union would be sort of a “United States of Europe”.

But first of all, as Glaser points out, this “United States of Europe” seems to be dominated by Germany, whereas in the “United States of America“, there is no entity analogous to Germany that dominates. If Louisiana gets hit by a hurricane, the rest of the country comes to its aid, without a lot of fuss and bother. While the state of Delaware gets back less than a dollar for every dollar they pay in federal taxes, you never hear them complain about South Carolina, which gets close to $8.00 for the same dollar.

One reason for this? Unlike the United States of America, the European Union is not a nation-state, it’s what Wikipedia calls a “politico-economic union of 28 member states“.

And by “member states”, they don’t mean “states” like Delaware and South Carolina, they really mean “nation-states” like Germany and Greece, so forgive me if I’ve said this before (which I have), but while the European Union may think of itself as the United States of Europe, in reality, it’s more like the so-called “United States” as we existed under our Articles of Confederation — a loose union of sovereign nations, which included actual nation-states like Connecticut and Rhode Island — but that was before we wised up and nipped that foolishness in the bud by turning the whole kit and caboodle into a proper country of its own — and, probably not coincidentally, granted it the exclusive right to print its own money which replaced money printed by the states themselves. Most of us probably don’t realize this, but in ratifying the Constitution, we were taking nationhood away from its individual states and granting it to the whole group of them.

In truth, any member nation using the Euro, a currency it does not control, is doing something similar to what Argentina was doing as it fought its way out of a weak economy in the early 1990s when it came up with the brilliant idea of setting the absolute value of its peso to one U.S. dollar, a foreign currency that it didn’t control. That worked well for a while, with the economy bounding back and kids stopped starving to death, but within the decade, after next-door neighbor Brazil devalued it’s own currency against that dollar, the whole Argentine economy fell apart again and didn’t right itself until it let the peso start floating again in 2002.

The moral? A country needs its own currency, and one that, when the situation demands it, the country can take absolute control over. No linking it to someone else’s currency, and no joining with other countries to share a currency. You need your own, period.

But given that Greece is not about to leave the Euro this week, we’re still faced with the problem of how to get its economy humming again. Let’s start with what Kevin Drum says:

Europe wants Greece to cut its spending and run a balanced budget.

Which is like demanding that they eat their cake and have it to. We know by now that it doesn’t work that way.

First, we need to remember the equation that defines a national economy:

Economy = C + I + G + (X – M)

Or you can put it this way:

A “National Economy” equals “Consumer Spending” plus “Business Investment” plus “Government Spending” plus (“Exports” minus “Imports”).

What most people forget about — in particular, Republicans like Carly Fiorina, who insists she’s the only candidate who understands the economy — is the existence of that “G”. Yes, our government’s spending is an important ingredient in the recipe that makes up our economy.

So now we see that it’s sort of like that “If you give a mouse a cookie…” story:

* When we cut government spending, then we’re cutting spending out of the economy

* When the economy is cut, then so is its income

* When incomes are cut, then so are income tax revenues

* A loss of a government’s revenues, by definition, increases the deficit

* And whenever the deficit is increased, some cluster of brain cells somewhere concludes that what we really need to do right now is cut government spending …

… and the whole race to the bottom begins all over again. And so, if Angela Merkel and her gang of German Princelings were only to look closely at Greece and apply some of that famous Teutonic logic, they will see that that’s exactly what’s been happening there.

If the countries of Europe really want to help make Greece strong, they should give it short- and long-term interest-free loans, but only on the condition that they increase government spending, and not reduce it.

(Reposted from July 17, 2015 at 7:56 am)