Step up come on and jump in, I know just what you’re scared of. You just need a good shove, say the lyrics of Mr. Coumbus a song by one of my favorite bands Grace Potter and the Nocturnals. Today, the start of Columbus Day weekend, Fitch downgraded the sovereign debt of both Spain (the country that supported Mr. Columbus) and Italy, (the country from which he hailed).
Grace’s lyrics seem to capture the problem in Europe. Simply put, the welfare state across the continent has been supported by borrowing, and with the Euro preventing countries from eliminating their debt load by inflating it away, governments are finding it difficult to support generous welfare states, monstrous public pension schemes, unnecessary building projects and complex tax systems that fail to collect sufficient revenues from politically powerful interest groups.
This is just another example of the fallacy that borrowing and spending lead to economic growth. The problems in Europe mirror the current deficit problems in the United States. Simply put, if an economy cannot produce as much as it consumes, over time it will weaken and eventually collapse. While the United States government can export a lot of the pain of its coming collapse onto foreign bondholders – or as my financial advisor says, on the little old ladies that saved all of their lives – by printing more currency and inflating away its deficits (what some would call a weak dollar policy), the European states cannot do that since their currency is controlled by the European Central Bank.It would be a wonderful thing if what the neo-Keynesians were saying were actually true. As an economist, I would love to see a world that was as simple as a model. But the world is a complex place where one action leads to dozens of other, often unsuspected actions. It would be great to live in a society where the air is pristine, where happy families all have 2.3 children who get wonderful public educations from caring civil servants, and where clean and rapid public transportation systems whisk us to our meaningful green jobs powered only by canola oil and the sun. In this world, the government can pull the resources to pay for everything off of the trees that were planted with carbon offset credits.
Unfortunately, live can be difficult and we live in a place that is a lot more like Mr. Columbus’s world than we care to admit. Often things are dirty. People worry about their own families and benefits and not society’s and civil servants are not enlightened. The citizens of Greece, Spain, Italy and those encamped in Lower Manhattan may not like it, but only hard work and productive effort will lead to economic growth and greater prosperity.