The Financial Times just published a summary of its survey of 32 European economists. Some think Say’s Law is dead, but eleven of these economists did not claim that fiscal stimulus was required to revive the teetering, near-deflationary economy in Europe. Maybe more surprising, only eleven of these credentialed men and women explicitly backed Keynesian fiscal stimulus.
This is hard to believe, but Say’s Law remains deeply embedded. I call Say’s Law one of the bad ideas in my recent book, Seven Bad Ideas, How Mainstream Economists Have Damaged America and the World. It is the cornerstone of the claims that economies are self-adjusting if government stays out of the way. The idea thrived in the 1920s and the 1930s, when so many argued the government should do noting to reverse the Great Depression. Lower wages and interest rates alone will revive the economy. And it made a comeback in the 1980s, when big federal deficits were the focus of economists’ criticism.
Not so, said Keynes. Say’s Law is the opposite of what is needed to revive an economy. The Obama stimulus of 2009 represented a temporary dismissal of the bad idea, but it has mostly returned. Most economists in the United States supported the Obama Keynesian stimulus, and some even a second stimulus. But there was no persistent drumbeat back then for the second one, and while economists did not support the sequester on balance, there was no shouting and screaming about it, as far as I could tell.
European analysts seem to be simply a mess. As anyone who’s read a headline in the past few years knows, Germany is refusing to spend money to revive its neighbors. Austerity economics there and in Britain remain the preferred choice. And many of their economists are comfortable with it. Britain is growing again after five years of painful recession, and it is called proof that austerity works. The Eurozone doesn’t even get that much relief.
Instead of stimulus to demand, many argue that strict labor regulations are holding back growth. In other words, make labor take the hit by eliminating laws protecting wages and job security. In some nations, this may well help. These markets can be rigid. But is that the whole game? The conservative ideology here is more than apparent.
A good example of such thinking is a recent column by a European correspondent of The Wall Street Journal’s, Simon Nixon. Why is growth sluggish in Europe? Says Simon Nixon: It’s China’s slowdown, the sanctions imposed on Russia (which particularly hurt Germany), and structural obstacles of labor and product markets, of course.
Not a word about austerity economics or inadequate monetary stimulus. The myopia is stunning.
Europe requires structural reform all right. It is reform of the unmanagebable debt of Greece, Spain, Italy and on. Terms should be lengthened and some debt even forgiven.
It then requires fiscal stimulus. American fiscal stimulus has been inadequate. Europe’s policies are perverse, however, and will not be forgotten by historians. Some of that stimulus can be directed at major investment programs as well, including infrastructure.
The United States has not done well, with its fiscal stimulus reversed by the 2013 sequestration. Growth is only now picking up, and its continuation still an open question. But U.S. policies are works of genius compared to Europe’s. One would think economists there would stand as a scientific bulwark against obviously class-based policies, like most climate scientists do against global warming deniers. That they don’t says something not only about them, but about economics itself.