Bubbles
John Schwenkler September 23rd, 2008
Especially if you’re the sort of person who likes pretty graphs, the Yves Smith post that I linked earlier is well worth reading in its entirety. Another excerpt:
Indeed, one can argue that our current mess resulted from our refusal to tolerate recessions, our running of an unduly lax monetary policy. Not only did Greenspan lower the Fed funds rate to 1% in the wake of the dot-com bust, he kept it low for an unprecedented amount of time. Some economists have also argued that our monetary policy was too permissive even before that, due to the Fed’s failure to take account of the deflationary effect of cheap imports.
Do go ahead and read the whole thing. You will come away significantly more enlightened than you went in.
Filed under: economics, government/law
Well, one of the reasons why Americans are so terrified of a recession is that we have no social safety net.
Say, for example, you are a responsible adult, who pays his or her bills on time. If you loose your job because of this recession, you could easily loose your health and your home, and god help you if you happen to have a chronic illness.
In other words, Americans use bull market as a de fact social safety net, whereas Europeans aren’t in nearly as dire of straits.
Really? I mean, don’t you think that if the European economy were to go into a tank, the suddenly cash-strapped government would have a hell of a time picking up the bills? At first when I saw “social safety net” I figured you were referring to help from family, church, and neighbor: I find it hard to believe that in a serious economic crisis the government could be the guarantor of housing, health care, etc. – the radically increased need and similarly radically reduced income from taxation would make this impossible.
“Americans use bull market as a de fact social safety net, whereas Europeans aren’t in nearly as dire of straits.”
There is not as big a difference as you are claiming. Europeans have simply traded a portion of economic growth for high tax rates to fund these more generous social services. It makes sense when times are good, but it is, as John stated above, highly unlikely that these very generous programs could continue to pay out during a systemic shock (and European banks are nearly as exposed American banks are) like the one we are experiencing. Both systems are premised on a) steady growth, albeit at different levels, and b) a steady transfer of wealth from younger workers to older ones. As the baby boomers retire, a system so clogged with debt is going to have great difficulty keeping the conveyor belt moving.
If Europeans have an advantage of stronger social welfare/safety net, they have a glaring disadvantage demographically (smaller families, older populations, earlier retirement, slightly longer life expectancy than in the US). If you think our current unfunded liabilities are bad, try doing that math when your fertility rate is 1.5 children per couple or lower (much lower in the case of Italy, Spain, Greece, etc.)
Thanks, Adam. George Will wrote about this sort of concern in his column today:
I do think – and this only occurred to me after I’d posted my comment – that Joseph’s point is valid so long as the recession is minor, and its effects confined to certain segments of the population rather than others. But a serious economic crisis – including, I suspect, the sorts of downturns that Yves Smith was talking about – will be a very severe strain on the welfare state.
It’s also worth noting that these sorts of problems are more pronounced when you have a strongly progressive tax structure: if the wealthy lose their money, there’s not a sufficiently broad tax base to pay the bills.