Internal Devaluation

Paul Krugman:

What’s striking about Spain, from an American perspective, is how much its economic story resembles our own. Like America, Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. Like America, Spain fell into recession when that bubble burst, and has experienced a surge in unemployment. And like America, Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs. But unlike America, Spain is on the edge of a debt crisis. [MORE . . .]

Now what? If Spain still had its own currency, like the United States — or like Britain, which shares some of the same characteristics — it could have let that currency fall, making its industry competitive again. But with Spain on the euro, that option isn’t available. Instead, Spain must achieve “internal devaluation”: it must cut wages and prices until its costs are back in line with its neighbors. [. . .] What all this means for Spain is very poor economic prospects over the next few years. [. . .]

The good news about America is that we aren’t in that kind of trap: we still have our own currency, with all the flexibility that implies. By the way, so does Britain, whose deficits and debt are comparable to Spain’s, but which investors don’t see as a default risk.

The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve, in effect removing the one big advantage we have over the suffering Spaniards. Republican attacks on the Fed — demands that it stop trying to promote economic recovery and focus instead on keeping the dollar strong and fighting the imaginary risks of inflation — amount to a demand that we voluntarily put ourselves in the Spanish prison

(Emphasis supplied.) I think Krugman is falling into the danger zone here with monetary policy and quantitative easing. He seems to be endorsing the idea that it is a magic bullet for our economic woes. Having read him on the subject, I am fairly confident that he does not think that but it seems to me he is overselling the potential of monetary policy solutions to our current economic mess. It is ironic that Krugman may be doing that for which he criticized the Obama Administration regarding the 2009 fiscal stimulus - overselling the policy. The difference here may be that in fact, I think the Obama Administration pretty much got the policy it wanted in 2009 on fiscal stimulus.

There has been some discussion of the incoherence and fingerpointing going on in the Obama Administration on economic policy. Mark Thoma, via Krugman and Brad DeLong, starts the discussion:

I understand that Congress may not have supported additional policy to try to stimulate employment, but the fight would have been worth it no matter the outcome, and with the administration actually leading rather than accepting defeat before the game has been played, the outcome may not have been as preordained as the administration seems to believe:

Obama could learn from Bush, by Richard Wolffe, Commentary, LA Times: The day before his party's shellacking in this month's elections, President Obama sat down with his economic team to examine the single most important issue for voters across the country: jobs.

But the question on the agenda was not how to accelerate the recovery or target job creation... The president had called the meeting to grapple with what he and his propeller-head economists have been debating for some time: the wonkish question of whether today's high unemployment rate is structural or cyclical. ...

Two years into this presidency, and many months into a sluggish recovery, may be a little late to try to agree on the root cause of today's high unemployment.

This lack of agreement on economic fundamentals is a primary factor behind one of this White House's most obvious failures: communications. As one senior Obama advisor told me the day after the disastrous midterms: "It was hard to find a single economic message when the economic team couldn't agree on a single economic policy." ...

However, a new economic team will not resolve the communications problems... In fact, the president has been frustrated by his communications strategy for most of the last year. ... Obama told me six months ago that poor communications had hampered his ability to execute his policies, and that was after several months of internal reviews.

[. . .]

(Emphasis supplied.) Thoma, DeLong and Krugman, economists all, focus on the notion that the Obama Administration seems to have bought into the "structural unemployment" nonsense. I actually was more struck by the statement from the President that "that poor communications had hampered his ability to execute his policies." Like Atrios, my question is what policies were hampered precisely? And how? Surely not the great HAMP program or other bank rescue policies. What precisely is the Obama Administration policy on job creation?

Sorry, this is not a messaging problem, this is a policy problem. The Obama Administration is failing on economic policy, in no small part due to the incompetent and corrupt Treasury Secretary Tim Geithner, who should be immediately fired.

Speaking for me only

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    Perhaps the communication problem (5.00 / 2) (#5)
    by Militarytracy on Mon Nov 29, 2010 at 09:25:52 AM EST
    exists in not getting all of us "sold" on the policy.  That is my take on it everytime the Obama administration says that they have a "communication" problem.  If we aren't all excited and overjoyed with being sold out and broke and broken, that's a communication problem....not a policy problem to them.  They seem to believe I'm dumb as a post and only need certain buttons pushed in order to be instantly happy or instantly sad or mad.  It never occurs to them being hungry, uneducated without the hope of one, sick, homeless, and jobless could or would actually factor in anyplace in I might feel about them and their policies.

    Evidence of your thesis... (5.00 / 1) (#10)
    by inclusiveheart on Mon Nov 29, 2010 at 12:07:20 PM EST
    The live announcement today that there will be a pay freeze for all Federal government workers.  It isn't good policy, but it is supposed to may you feel good - the legion of government workers, on the other hand, not so much - and the retailers who might have benefitted from the government worker's spending, not so much - and the charities that might have received a modest contribution from a government worker or two, not so much, etc.  But all the dumb posts will feel instantly happy about this announcement.  Fantastic!  {Sarcasm}  Way to govern, people!  {More sarcasm}  Act like it's all one big campaign season and nothing that is said or done actually affects people's lives.  {Sad Reality}

    Well, Obama is about to hold a press conference (5.00 / 2) (#7)
    by Dr Molly on Mon Nov 29, 2010 at 10:48:55 AM EST
    announcing a federal pay freeze. Sure - that's the answer; it will definitely help fix the economy. I'd love to see the economic theory that shows any benefit to the economy of doing this.

    What a bunch of morons...

    Purely political theater (none / 0) (#13)
    by MKS on Mon Nov 29, 2010 at 12:43:17 PM EST
    But if that is all that is done right now to fix the deficit, then it is a good idea....

    Bleed off the pressure to do some truly stupid things.

    Reminds me of school uniforms....


    But not a good idea (5.00 / 1) (#14)
    by Dr Molly on Mon Nov 29, 2010 at 12:58:39 PM EST
    for those of us who work for the federal government.

    First of all, 'big government' is not the problem. 'big corporate profits' is the problem. Just more republican-lite non-policies that will accomplish nothing substantive.

    Second, what many usually don't consider:  the vast majority of federal workers (such as those at my agency) are people without college degrees, from underprivileged backgrounds, making a fair-to-decent living, who started at the bottom of the government pay scale and who would otherwise be working minimum-wage jobs. Why these people should be penalized with a payfreeze in this economic climate is beyond me....


    A pay freeze... (none / 0) (#18)
    by kdog on Mon Nov 29, 2010 at 03:56:04 PM EST
    isn't a punishment...it's a reality.  Last I heard we're broke.  That being said, there are reams of federal spending to cut before we freeze low-level federal employee pay.  That was always a selling point of working for the government...a lot of stupid rules and beuracracy to deal with, and you won't get rich...but you get regular raises and good benefits and job security.

    And who do you think enables those big corporate profits by rigging and pulling strings?  The big government.  They're both part of the problem, cuz they're obviously in bed together.  I'd imagine the pay freeze will free up money to further fellate corporate America....reverse robin hood mission accomplished.


    broke. (none / 0) (#19)
    by Dr Molly on Mon Nov 29, 2010 at 07:18:57 PM EST
    A pay freeze... (none / 0) (#18)
    by kdog on Mon Nov 29, 2010 at 03:56:04 PM EST
    isn't a punishment...it's a reality.  Last I heard we're broke.

    It's not a reality for the top 5% of earners, why should it be a reality for the government minions?

    And who do you think enables those big corporate profits by rigging and pulling strings?  The big government.

    This is where you often paint too broad a brush for viewing federal government workers kdog - the vast majority of whom are just working stiffs like you and everyone else, not earning all that much and certainly not 'enabling big corporate profits by rigging and pulling strings'.


    Molly, (none / 0) (#20)
    by NYShooter on Mon Nov 29, 2010 at 09:37:20 PM EST
    I don't think you read deep enough between Kdog's tongue & cheeks.

    He's a schlub-champion, from his first breath in the morning, to his last (intoxicated) breath at night.

    think: <snark>


    Broke... (none / 0) (#22)
    by kdog on Tue Nov 30, 2010 at 09:59:47 AM EST
    It's not a reality for the top 5% of earners, why should it be a reality for the government minions?

    Somebody needs to reside in the valley of the real so the top 5% can live the reverse robin hood life...it can't just be private sector working stiffs feeding the reverse robin hood machine, public working stiffs need to socialize bilionaire losses too for this to work:)

    We're on the same page Doc..I'd disband the DEA before freezing any 40k a year secretary's salary...but nobody else is down with my plan to get the books in order via elimination of obvious harmful spending and harmful big government first, then see where we're at.


    And there's always Dubai- (none / 0) (#1)
    by ek hornbeck on Mon Nov 29, 2010 at 08:44:56 AM EST
    They are just ahead of us. (none / 0) (#2)
    by Abdul Abulbul Amir on Mon Nov 29, 2010 at 08:53:41 AM EST

    But unlike America, Spain is on the edge of a debt crisis.

    Very astute you pointing (none / 0) (#3)
    by Militarytracy on Mon Nov 29, 2010 at 09:10:56 AM EST
    out that it is a little more than highly likely that Krugman is overselling the capabilities of Fed monetary policy and QE being able to fix what ails us.  Unfortunately, whether or not high unemployment was going to be cyclic or structural had everything to do with the choices that were made and who was going to be "saved" at the start of all this.

    check the last open (none / 0) (#4)
    by Capt Howdy on Mon Nov 29, 2010 at 09:22:09 AM EST
    Krugman is adapting his view to (none / 0) (#11)
    by inclusiveheart on Mon Nov 29, 2010 at 12:13:34 PM EST
    the recent shifts in power within the government; and just trying to protect one such center from losing its ability to compete within the system.  He's trying to keep the options open - to preserve flexibility - his approach may over emphasize the quantitative easing approach, but I would guess that he'd prefer that policy over having the likes of John Boehner quixotically, destructively and/or ignorantly calling the shots over at Treasury.

    Yes, I take that from my readings of (none / 0) (#15)
    by Militarytracy on Mon Nov 29, 2010 at 01:23:38 PM EST
    Krugman too.  He will go down with the ship stuffing rags into holes hoping to make the current available argument that has a chance of being heard.  He became tired of making the argument that Obama and Obama cheerleaders would ridicule along with Fox News....not that that problem has completely diminished for him.  He also knows that other voices out there will make more demanding arguments attempting to induce bold action.  If bold action was ever on the table though and could still be beneficial, I know he would be all about bold action.

    You're both right (none / 0) (#21)
    by NYShooter on Mon Nov 29, 2010 at 09:42:20 PM EST
    Krugman hasn't changed his views, simply adopting his advice to the ever changing, inept Government, moves.

    "Stuffing rags"........good one.


    Spain's socialist party (none / 0) (#6)
    by Buckeye on Mon Nov 29, 2010 at 09:34:59 AM EST
    that was running their government was generating surpluses while inheriting deficits from its conservative party.  America's "conservative" party was running deficits even though it inherited surpluses from the Democrats (we do not have a socialist or liberal party).

    What is actually happening in Spain needs to be understood right now due to the "deficit commission" and the proclamations from conservatives, now in control of Congress.  The aphorisms from the right regarding Europe are things like: "see what is happening...European socialism does not work."  "They are going broke right now and are cutting back on their social safety net...we were right and America needs to do that as well."  "While they are going broke, we are moving in the same direction with Obamacare, stimulus spending, etc.  We need to move in the other direction, including cutting Social Security before it bankrupts us as well."

    Spain is tapping into its social safety nets making cuts, as well as "internally devaluing" its economy not because the social safety net was the root cause of the problem.  But they are choosing austerity because they believe they need to find some way to pay off the recklessness of bankers and private sector debt/spending to appease the bond market.  And it is a very bad idea to choose austerity right now anyway.  Americans need to understand this before they get frightened by what is happening to Europe and use that to justify to themselves why we need to dismantle the small social safety net we do have.

    Love Wolffe's line (none / 0) (#8)
    by cal1942 on Mon Nov 29, 2010 at 11:06:12 AM EST
    propeller-head economists

    Perfect description of the whole damn team.

    The Ivory Tower Administration.

    Along with canning Geithner (none / 0) (#9)
    by cal1942 on Mon Nov 29, 2010 at 11:13:06 AM EST
    how about firing everyone hired or recommended by Rubin's kid during the transition as well as the holdovers from his campaign.

    While there is a whole universe (5.00 / 1) (#12)
    by inclusiveheart on Mon Nov 29, 2010 at 12:16:46 PM EST
    of other people out there to choose from, I don't think that they actually "know" anybody else outside of that tight Rubin/Summers/Geithner clique.

    So, they could fire them all, but they'd probably just get replacements from the same sources - nothing would change except name plates on the desks assigned to the WH economic team.


    Obama knows other people (none / 0) (#16)
    by Militarytracy on Mon Nov 29, 2010 at 01:26:34 PM EST
    Those are the people that get chewed out for their Op Eds via those close to him in a private setting :)  This President has his own economic beliefs and he's sticking to them until it is too late.  Of that I'm certain.

    But he doesn't "know" them. (5.00 / 1) (#17)
    by inclusiveheart on Mon Nov 29, 2010 at 02:22:16 PM EST
    To put it another way, they are not a part of the approved inner circle.

    Just remember that Geithner appeared to be an outsider to most Americans when he came into the limelight.  Little did most people know that he had been on the inside pretty much his whole life.  There are more Geithners out there from which Obama would likely choose over any columnists who shall remain nameless - or at least totally powerless...