Slow Consumer Spending in EU

As the talks of a recovery in Europe continue, the search for tangible evidence of that recovery intensifies. So far, the evidence is that the recovery is basically limited to wishful thinking. But since I am an economist and a scholar, not a pundit, I always prefer to rely on facts, theory, experience and methodologically good analysis in a prudent combination. Therefore, when people persistently claim something I disagree with, I take the opportunity from time to time to question my own position.

Today is one of those days. Alas, the question: is there really no recovery under way in Europe?

Since we have already, in vain, looked at GDP growth to try to find any signs of better times ahead, let us broaden the search a little bit. The largest share of GDP – in a healthy economy – is private consumption. It should constitute 70-80 percent of GDP, though because of the heavy reliance among European countries on exporting their production (rather than satisfying needs at home) many EU states tend to have gross exports that exceed private consumption.

But even when consumption is smaller than gross exports, it is still a good indicator of how strong the domestic economy is. Therefore, it also serves as a good indicator for where the economy is heading in general.

To find out more about how (un-)willing European consumers are to spend money, we turn to Eurostat’s national accounts data. While annual numbers are usually the most solid base for long-term trends, in this case quarterly data can serve us better. We can concentrate on a short period of time, 2008-2013, and still get a relatively large series of observations (24 in all).

Here is what we find:

1. In order to build a bridge back to the previous analysis of GDP growth we need data of the same quality that covers both GDP growth and growth in private consumption. A total of 19 EU member states report such data, which happens to be not seasonally adjusted but adjusted for inflation.

2. Growth is measured over the same quarter in the previous year. This minimizes the influence of artificial swings caused by the political whims of lawmakers during a fiscal year. Also, the reported numbers are unweighted averages for these 19 states. A weighted average would of course be better, but for the purpose of a blog it is not worth the extra time to add weights.

3. Last year, 2013, was not a particularly strong growth year. Of all the 24 quarters studied, eight quarters were better than any of the quarters of 2013. The fourth quarter of that year saw consumption grow by 0.74 percent, half as good as the third best quarter of the perioid (Q2, 2011, 1.5 percent). The remaining three quarters of 2013 rank 13th, 14th and 20th. Not exactly screaming of a recovery.

4. Every quarter in 2011 saw stronger growth than any quarter of 2013, with growth rates ranging from 0.96 percent to 1.32 percent.

5. In fairness, it is worth comparing to 2009, which was an absolutely abysmal year. Consumption contracted between 2.42 and 3.83 percent. In other words, while 2013 was not exactly a year to be jubilant about, it also wasn’t a disastrous year. Just an average year of economic stagnation: the average quarterly growth rate for private consumption in 2013, for the reporting 19 EU states, was -0.12 percent.

Long story short: no recovery under way. As a reinforcement of this point, consider the following chart:

GDP C 19 EU

The close correlation between the growth rates of consumption and GDP has an obvious explanation in the fact that, again, private consumption is its largest domestic spending item. But there is an important point buried in this correlation: consumer spending is a large driver of GDP growth. This means that prosperity in general depends heavily on consumer sentiment.

As reported above, 2013 was by no means a remarkable year for consumer spending. While each quarter saw a slightly higher rate of growth, this does by no means constitute a recovery. The upswing during 2010 was notably stronger, and led to a top growth rate of 1.5 percent in the second quarter of 2011. After that peak, growth turned negative again for four consecutive quarters and has not yet reached one meager percent since then.

Until consumer spending reaches the levels it had before the Great Recession (at least 2.5-3 percent per year) there will be no recovery in the EU. Consumer spending, in turn, is held back by high taxes and unpredictable entitlement programs. A stable, confidence-inspiring fiscal policy is the first step toward a recovery. Beyond that, there is a lot Europe’s governments need to do, but that is a story we can get back to once we actually see a recovery in Europe.

Reality vs. Socialism

Since the ANC got into power in South Africa two decades ago, the majority of the population is, legally speaking, no longer held back as second-class citizens. There were many of us who wished South Africa well on that symbolic day when Nelson Mandela took office as the country’s first black president.

Since then, the ANC has failed miserably. From practically every measurable economic angle, South Africa is in worse shape today than it was under Apartheid. This is terrible for many reasons, one being that nobody should have any reason to wish for a return to the days of oppression just because they had bread and peace back then. But instead of creating a truly free South Africa where everyone could pursue prosperity on the free markets of Capitalism, the ANC has built one of the most corrupt welfare states in the world. For my analysis of the ANC failure, see these three articles:

South Africa’s Stubborn Socialists

Socialism Fails at Socialism

ANC: Man Up or Destroy South Africa?

Perhaps it was naive to believe that the ANC would ever do anything different than what they have done. After all, their leaders during Apartheid were trained, funded and schooled by radical Swedish socialists like Olof Palme, Pierre Schori and Sten Andersson. (There have been unsubstantiated speculations that the 1986 assassination of Prime Minister Palme was the work of Operation Longreach, a project by South African military intelligence, and that the motive was his unrelenting support for the ANC.) But if it is naive to believe that even a fervent socialist some day will see the light and become a friend of freedom, then maybe it is not that bad after all to be a bit naive.

In fact, reality offers socialists ample opportunities to learn. The latest example from South Africa is the botched plans to attract new car manufacturing investments to the country. Business Day reports:

Strikes and a turbulent labour situation may have cost South Africa the chance to manufacture the new Datsun. This was one of only four countries which the Japanese motor giant had identified as a market in which to relaunch a brand that disappeared years ago.

This is a major failure by the South African government. To see why, let me walk you through a background story. Nissan bought Datsun more than three decades ago. Back in the ’70s Datsun cars were very popular in many Western markets for their combination of durability, affordability and performance. Since then Nissan has gone through some turbulent ups and downs, with the initially successful launch of premium brand Infiniti in North America, a launch that led to cars like the excellent Q45 and right-sized, well appointed QX4.

However, past the Millennium Recession Nissan were not very good stewards of their success. They turned Infiniti into some tech geek outfit and their cars began losing their soul. An exception: the third generation M45, a performance-luxury combination on par with its German competitors.

With Infiniti losing ground to primarily Lexus, BMW, AUDI and Mercedes, Nissan saw margins decline from its vast North American operations. The same happened in Australia and many other markets around the world. It needed a revival plan, but instead of focusing on reinventing its products Nissan threw itself into the arms of French crap-car maker Renault. The government-appointed bizocrats in charge of Renault have since transformed most Nissan-branded cars into weird modes of not entirely reliable transportation. A couple of notable exceptions, the hugely capable Xterra and the perennial Frontier, can’t fend off the impression that Nissan has lost its way completely. Infiniti has succumbed to accounting dictates and geeky electronic engineering, now building cars that are more transportation pods than automobiles. (A Kia is more attractive these days than an Infiniti. A Kia!)

This long background story is important, because it explains why Nissan is re-launching its Datsun brand. It wants to regain a foothold in the global auto market with vehicles that reflect its now distant past: cars that are simple, reliable, affordable and fun. The new Datsun brand is primarily aimed at non-Western markets where consumer purchasing power is not very strong but cars are increasingly a part of every family’s life.

South Africa is a good example of a market where Datsun can become strong. With Africa becoming the new growth continent it would make perfect sense to build Datsun cars in South Africa. All the more reason to mourn the stupidity of the South African government in botching the deal.

Business Day again:

Speaking to Business Times in Chennai, India, this week at the launch of the new Datsun GO model, Datsun’s global head, Vincent Cobee, said that labour uncertainty was one reason why Datsun would now produce the new version of the iconic brand in India and then export it to South Africa. Sources say Nissan representatives and suppliers held high-level talks with the Department of Trade and Industry in November. They expressed concern about the impact of the strikes on foreign investment, and emphasised that the subsidies intended to expand the vehicle market would not work if labour remained unreliable.

Unions in South Africa are closely tied to the ANC. This is the case in every country where socialist parties are strong – they have a political branch that goes after legislative power and a union branch that organizes labor, uses the member masses as a political tool and funds party operations by means of membership dues. This is the case all over Europe, especially in Sweden, the country whose socialist leaders mentored ANC politicians for decades, and it is certainly the case in South Africa, too.

This means that it is foolish to believe that the ANC has nothing to do with strikes and labor market unrest. South Africa’s economy has been doing poorly in recent years, with high inflation and high unemployment. On top of that the ANC has done its best to tax and regulate the productive sector of the economy to a point where it no longer provides a fully reliable tax base for all the entitlement programs that a socialist welfare state always offers.

As a result, political tensions have grown within the ANC conglomerate, and the ANC has lost a fair amount of credibility among its black voter base. To divert focus from the failed promises of the ANC’s political branch, its leadership has launched a campaign of labor unrest.

To an outside observer this may seem illogical, especially Americans who have only scant ideas of what socialist activism really looks like. However, it is perfectly logical to anyone who has seen close-up how Europe’s socialist political machines operate.

Unrest on the labor market is aimed at pinning the blame for low wages, high unemployment and high inflation on the evil capitalists who have the audacity to build businesses and create jobs for people. There is no doubt in my mind that the ANC has deliberately allowed labor-market unrest to proliferate for precisely this reason, in hopes that it will allow them to perpetuate their hold on political power.

Too bad, then, that the chickens decided to come home to roost. Business Day again:

This is yet further evidence of how the labour standoff is costing South Africa much-needed foreign investment. It comes while the world’s top three platinum producers are being battered by strikes costing nearly R200m a day, according to the Chamber of Mines. Last month, members of the Association of Mineworkers and Construction Union downed tools at Anglo American Platinum, Impala Platinum and Lonmin, demanding that pay be more than doubled. Nissan’s decision comes months after German manufacturer BMW scrapped plans to build an additional model in South Africa for worldwide export after a crippling strike that cost the industry an estimated R20bn.

How many times must a man look up before he can see they sky…

Although the Cosatu-affiliated Metal and Allied Workers Union announced on September 11 last year that it had obtained a three-year agreement of 10%, 8.5% and 8.5% increases, the deterrent effect on new vehicle investors meant it was something of a pyrrhic victory.

Of course it is a pyrrhic victory. You cannot have labor costs rise at those rates year in and year out unless that same labor force is upping productivity by matching numbers. That could happen in Japan or China; it could happen in Thailand or India, and it is happening here in the United States (where, for example, Hyundai has shown the way to excellent productivity in automotive manufacturing).

The way these wage contracts were forced upon the South African auto industry is eerily reminiscent of how the United Auto Workers here in America brought down the Big Three in the ’90s and 2000s. You would expect that socialists in South Africa had learned from that lesson.

But no…

Business Day again:

Nissan said in 2010 it planned to sell its new Datsun in Russia, India, Indonesia and South Africa, targeting people with new-found disposable income. ’’We know that every three years there are negotiations in South Africa in the motor industry,” said Cobee. ’’But it was the duration and strength of the strike that was cause for concern.” The timing of the strike, Cobee said diplomatically, was ‘’not ideal”. The company will still launch its new Datsun GO brand -a five-door entry-launch hatch -in South Africa during the fourth quarter this year, but the vehicles will probably be built at the Renault-Nissan plant in Chennai, India. It has hired 700 extra workers and created an extra shift to build the new cars.

Maybe they should call the car Sayonara in South Africa, especially since Nissan has found other countries to build its low-cost cars:

Cobee said that South Africa’s opportunity to compete against the big four car manufacturing countries — Mexico, China, India and Morocco — would disappear unless it fixed the problem. ’’In China, the car industry has the backing of the government. In India, the private sector funds it. But in South Africa it is not clear who is laying the foundation to make that country the desired choice in Africa to serve Africa,” he said. ’’This is a massive opportunity for South Africa. If it is missed, it will not come back.” Nissan already has plants elsewhere in Africa — Algeria, Morocco and Egypt, with a new one opening in Nigeria next month.

And, directly to the point:

While the local labour force becomes increasingly unreliable, these countries are fast-replacing South Africa as viable alternatives.

How many times must reality poke a socialist in the side before he wakes up?

Stiglitz Performs Inflation Raindance

Here is yet another sign that the socialists are increasingly confident about winning the European elections in May. From EU Observer:

The European Central Bank (ECB) should scrap its target to keep price inflation at 2 percent, Nobel prize winning economist Joseph Stiglitz said on Thursday (6 March). Speaking at an event organised by the European Parliament’s Socialist group, Stiglitz said central banks should look to strike a balance between controlling inflation and supporting job creation. “The ECB’s mandate needs to be changed,” he noted.

They spend money on inviting Stiglitz, who probably cost them north of $25,000 including travel, accommodations and honorarium. He is not only a well-known economist but also a fervent supporter of the Venezuelan version of socialism that has sent a formerly prosperous nation into an economic tailspin of runaway inflation and reckless statism.

This alone is probably reason enough for Europe’s parliamentary socialists to invite him. But more important is Stiglitz’s recent recommendation that Europe should continue to grow government. Here is where he really appeals to an emboldened left, determined to restore the welfare-state spending cuts during years of austerity.

When Stiglitz tops off his praise of government with a jab or two at the ECB, there is no stopping the socialists from giving him all the money he wants in order to come over and talk to them. The EU Observer again:

Stiglitz is a long-standing critic of inflation-targeting by central banks, believing instead that monetary policy should be used to stimulate employment.

That is what both the ECB and the Federal Reserve have been doing. The Fed has been printing $85 billion per month for several years now to fund the U.S. government’s deficit. ECB still stands by its pledge to buy any amount of bonds from any “troubled” euro-zone country, any time. Both these monetary policy strategies aim precisely at what Stiglitz is after, namely rock-bottom interest rates to stimulate private-sector activity.

In other words, Stiglitz is breaking through open doors. But as the EU Observer reports continues, so does Stiglitz. Through the open doors, that is:

Stiglitz’s remarks came as ECB president Mario Draghi kept the bank’s headline rates, including its main interest rate, at the record low of 0.25 percent, following a meeting of the bank’s governing council the same day. Draghi said the bank decided to leave the rate unchanged because of continued signs the eurozone economy is slowly recovering. “We saw our baseline by and large confirmed. There is a continuation of a modest recovery,” he told reporters in Frankfurt.

Yes, the recovery

It is unlikely that Stiglitz is really flying all the way from New York to Strasbourg to talk propose a monetary policy that is already in place. More likely, he is on a crusade to pave the way for higher inflation. A faster rise in prices is a wet dream for many statists, as it would inflate tax revenues and close budget gaps without either a need for spending cuts or a pesky fight with those who think taxes should go down, not up.

If this is what Stiglitz is really after, then as the EU Observer reports he has a staunch ally in EU Commissioner Olli Rehn – also known as the Grand Master of European Austerity:

New forecasts published by ECB staff estimate that inflation will stay at 1.0 percent this year, 1.3 percent in 2015, and 1.5 percent in 2016 – comfortably below its 2 percent target all the way through the projection. Last month, the bloc’s economic affairs commissioner, Olli Rehn, warned that low inflation is making price cuts in the peripheral economies less effective at boosting their competitiveness, making it harder to geographically rebalance the economy.

The EU Observer notes that the ECB is not allowed to let inflation rise past two percent…

However, the ECB’s main mandate under the EU treaty is tightly restricted to the maintenance of ‘price stability’ across the eurozone at a rate of around 2 percent per year.

…which explains what Stiglitz really flew over to Europe for: to give the socialists some fuel for pursuing a constitutional change to the ECB mandate.

It is regrettable that anyone is arguing for inflation. It is even more regrettable when that anyone is a reputable economist. And the whole matter gets a bit scary when you consider that the Inflation Raindancer from Columbia University may just have spoken to the people who will actually govern Europe over the next five years. Where is the concern for the standard of living of hundreds of millions of Europeans? Where is the concern for real wages, the value of savings, the predictability of contracts?

So long as inflation stays within 3-5 percent the economy is not going to run away (although five percent is beginning to smell macroeconomic mismanagement). The problem is that politicians who think they can cause inflation won’t know how to rein it in once they have created it.

None of this is apparently of any consequence to Stiglitz. But before he flies over to Europe again, perhaps someone should ask him if he thinks inflation in his beloved Venezuela – reported to be up to 35 percent now – is something for Europe to strive for.

Wishful Recovery Thinking in Europe

Don’t get me wrong – I would be thrilled if Europe could enter a phase of solid growth and sustained recovery. But having studied the European crisis in depth over the past two years (with a book due out in July) I also know what it takes for that economy to recover. So far I do not see anything that tells me it is happening, and I certainly do not see the political open-mindedness needed for the Eurocrats to enable a recovery. On the contrary, I see Europe’s political leaders play “Where’s Waldo?” with the economic recovery. On February 25, the EU Observer declared:

The EU’s economic recovery will gather speed in 2014 and 2015, the European Commission predicted on Tuesday (25 February), indicating that the worst of the economic storm which hit Europe is over. “Recovery is gaining ground in Europe,” economic affairs commissioner Olli Rehn told reporters at the European Parliament in Strasbourg, saying that the EU economy would grow by 1.5 percent in 2014 and 2 percent in 2015. The recovery would be driven, in the main, by increased domestic demand and consumption, as Europeans and businesses become more confident about their economic prospects, he added.

Then today, EUBusiness.com reports:

The European Central Bank on Thursday raised slightly its growth forecast for the euro area this year, but trimmed its forecast for inflation. ECB president Mario Draghi told a news conference that the central bank is pencilling in economic growth of 1.2 percent in 2014, 1.5 percent in 2015 and 1.8 percent in 2016. That represent a fractional upward revision of 0.1 percentage point for 2014, compared with the ECB’s previous projections published in December, Draghi said.

Of these two sources, it would be wise to trust neither. They have both presented spiced-up growth forecasts more times in the past few years than anyone cares to keep track of. But there is no doubt that of these two institutions the ECB possesses the better tools to be fairly accurate.

That said, there are a few items in the way of a recovery, even at the very modest numbers that the ECB foresees. According to the EU Business article, the central bank predicts that

External demand would benefit from the global recovery gradually gaining strength. Domestic demand was expected to benefit from improving confidence, the accommodative monetary policy stance and falling oil prices which should lift real disposable incomes. “Domestic demand should also benefit from a less restrictive fiscal policy stance in the coming years and from gradually improving credit supply conditions,” the ECB said.

The phrase “in the coming years” is critical. So far there has not really been any change in fiscal-policy preferences in the EU generally. Greece is still under austerity pressure, and the French government has gone on a fiscal rampage through the economy, spearheaded by outright confiscatory income taxes. If the EU declared an unequivocal austerity cease-fire, then the member states would stand a chance of getting somewhere down the road of a recovery.

As things are now, it is simply not credible to forecast a recovery. Unemployment numbers point toward a state of stagnation at best, and as I explained on February 17, a more comprehensive look at the European economy suggests stagnation, not recovery.

Since then, Eurostat has released quarterly GDP growth rates for the last quarter of 2013. For the EU-28 there is a little bit of good news: growth was 1.1 percent, adjusted for inflation, over the fourth quarter in 2012. It is the highest quarterly growth rate in more than two years, but it does not give us a full picture of what is actually happening on the ground. Eurostat has so far only released state-specific data for 18 of the EU’s 28 member states, but practically every one of those states reports an increase in year-to-year growth for the fourth quarter of 2013 compared to the third quarter of 2013.

Taken together with the less-disastrous numbers for the third quarter, the fourth-quarter numbers could be interpreted as an emerging recovery trend. However, as this figure shows, EU GDP growth has fluctuated rather violently over the past few years, and even sustained above two percent for a while, without any trend emerging toward an economic recovery:

qwerty

If, as the ECB says, the recovery depends primarily on a better global economy, then we are back to the case of an exports-driven turnaround for the European economy. As I explained last summer, it is practically impossible for exports to pull a modern economy out of its slump.

But even more important than this is the fact that the Europeans have re-calibrated their welfare states. The in-depth meaning of this will have to wait until another article; the short story is that government budgets in many European countries now balance at a lower activity level. As a result, it takes less growth in GDP to generate a budget surplus, a surplus that constitutes a net drainage of money from the private sector to government – where it is not spent. This puts a dampener on GDP growth, and it also leaves more workers idle as it takes fewer workers to produce the taxes that government needs.

The re-calibration of the welfare state is a result of austerity and an important reason why Europe is facing stagnation, not a recovery.

Europe Turns to Socialism

On February 19 I explained:

There is an important reason for my projection that the European crisis is moving into a long-term stagnation phase: the Europeans are not willing to give up their welfare state. The welfare state caused the crisis, primarily by using taxes to deplete margins in the private sector and by using entitlements to discourage work and entrepreneurship. Eventually, all it took was a regular recession spiced up with some speculative losses in the financial industry, and the entire Western world was hurled into a deep and very persistent crisis. Unfortunately, the Europeans have not yet seen the light. (Perhaps they will when my book is out this summer.) Especially European voters are very persistent in demanding that the welfare state remains in place. This is particularly evident in a pan-European poll predicting the results in the May elections for the European Parliament.

That poll showed strong socialist gains among European voters. This is hardly surprising, given that the majority of Europe’s voters apparently believe that the last few years’ worth of austerity policies have been an ideological attack on the welfare state. In reality, it was a warped, economically stupid attempt to save the welfare state by making it fit inside a smaller, crisis-burdened economy. Higher taxes combined with spending cuts – in any combination – has the result of raising the burden of government on the private sector, hence to preserve the welfare state under tougher economic conditions.

As is well known, Europe has long history of fascination with socialism in various forms, from the light versions applied in assorted iterations of the welfare state to the full-blown totalitarian variant that plagued the Soviet sphere for decades. Generations of Europeans have grown up to a life in deep dependency on government. This is unhealthy anytime, anywhere, but it becomes economically dangerous in a crisis like the one Europe is now stuck in.

As if to compound the prospect of a collectivist victory in the May EU elections, the French socialists have launched a bold campaign to win a majority of their country’s delegation to the European Parliament. From Euractiv.com:

France’s ruling Socialist Party (PS) kicked off its European election campaign on Monday (3 March) with the ambition of securing the majority of French seats in the European Parliament, which is currently held by the country’s centre-right party, EurActiv France reports. At a press conference, the French Socialist Party’s first secretary, Harlem Désir, confirmed the Party of European Socialists’ (PES) ambition to take over the majority of seats in the EU Parliament and the job of EU Commission president. Europe, Désir said, “must turn the page of Liberal and Conservative governments, which for years have harmed the European dream. Their blind support to deregulation, widespread competition, fiscal and social dumping, has only led to austerity, unemployment and soaring populism across the continent.”

Yes, how horrible to deregulate markets so people and businesses have more choices. What a horrifying thought to let businesses compete with each other so the best one wins… I can’t wait until the socialists take over the Olympics. Imagine…

  • In the 100 meter sprint, everyone has to get to the finishing line at exactly the same time. If someone gets ahead, the distance by which he won is taxed away and given to those who were last in the race.
  • To assure there is no gender discrimination, the race has to perfectly represent the 50-something different genders that apparently exist in this world (of course, you’d have to expand the width of the race track accordingly…)
  • In hockey, if a player scores a goal for his team he will immediately have to place the puck in his own team’s goal.
  • Gymnasts can no longer be very thin and small. All sorts of women of all sizes must be given the exact same chance to participate, not to mention the same points, regardless of their performance.

Socialist Olympics – where everyone’s a winner!

Now back to the EU election and the Euractiv story, which reports that the socialists are eagerly trying to engage other parties in a debate between the candidates for the presidency of the EU Commission:

For the Socialists, the “presidential” debate is also an opportunity to equate the [liberal] EPP with the incumbent Commission’s results, notably on issues such as social dumping and crisis management. “We are starting in a European climate of sanction towards the outgoing team on the right wing, which led a policy of austerity, recession and stagnation on the economic and social plan,” said Jean-Christophe Cambadélis, the campaign director for the EU elections.

This is actually an important point. By focusing so intensely on austerity throughout the crisis years, the incumbent EU Commission has indeed added fiscal insult to Europe’s macroeconomic injury. Ironically, their policies have expanded the presence of government throughout the economy by taking more from the private sector (higher taxes), giving less back (spending cuts) and depressing private consumption and business investments (higher taxes). In doing so, the commission has gone squarely against the purported ideological foundations of the conservative and liberal parties that have held a majority in the European Parliament since the 2009 elections.

In a matter of speaking, their deviation from their own ideological platform – their endeavor into statist territory – is now paving the way for “real” statists to take over.

And take over they will, says Euractiv:

According to estimates from the website Pollwatch 2014, the European Socialists and Democrats (S&D) would get 217 seats, while the EPP would get 200. The PS secretary general stressed that employment would be at the heart of the European campaign. “Jobs will be our priority,” said socialist MEP

Sounds good when you first hear it. So what do they want to do?

Catherine Trautmann, who took part in the press conference, mentioning the fight for a minimum wage at European level. To curb youth unemployment in particular, the PS secretary general has announced plans to strengthen the budget for the Youth Guarantee Scheme.

A minimum wage across Europe?? This is as ludicrous an idea as anything I have seen recently. What is it going to be measured against? Reasonably, it would have to be against some sort of benchmark, such as a fixed percentage of mean household income.

The problem with that – well, one of the problems with it – is that the benchmark would vary enormously from country to country. The way the European socialist party puts this idea it would be based on the same benchmark across the EU, which, using mean net household income would be 17,475 euros. Let’s say now that the minimum wage is 40 percent of that (a fraction sometimes used when calculating poverty ratios). This means that an average European household living on minimum wages would earn 6,990 euros.

Sounds fine and dandy, right? The problem is that the mean household income in seven EU member states are actually below this level. In Bulgaria and Romania the the minimum-wage level household income would be more than twice the mean household income.

In other words, an exquisite recipe for crashing the labor markets – the entire economies – of Europe’s poorer countries.

Apparently, this is not a problem for Europe’s socialists. Their next suggestion, as per the quote above, is more tax money to a government-run artificial-employment program they so aptly call “Youth Guarantee Scheme”.

It’s a scheme alright… But humor aside, the last thing Europe needs is more regulatory incursions, higher taxes and more people dependent on government. It will only cement the continent as an economic wasteland, stuck in permanent stagnation and industrial poverty.

No Recovery in EU Unemployment

Eurostat, the EU statistics agency, has released new unemployment numbers for Europe. The EU Observer notes that in January the unemployment rate for the euro zone was 12 percent, unchanged from a year ago, while unemployment in the EU as a whole was down by two tenths of a percent to 10.8 percent.

This is the short story of European unemployment, giving the impression that the crisis has stagnated and that there is a small, slow turnaround happening, at least outside the euro zone. But is this true? I recently reported macroeconomic data that show that the European economy is in a state of stagnation, not a recovery. I have also pointed to Greece as an example of how the crisis over the past few years is morphing into a depressive state of economic stagnation.

If I am correct, we should see evidence of a permanent stagnation in Eurostat’s unemployment numbers.

Before we get to the month-to-month numbers, let us take a bigger view of annual numbers which are now reported through 2013. For the European Union as a whole, unemployment has increased almost every year since it was 7.1 percent in 2008. In 2009 it reached nine percent; in 2010 it was 9.7, remaining at that level in 2011. In 2012 it rose again to 10.5 percent.

In 2013 it was up again, to 10.9 percent.

The euro area follows a similar pattern: 7.6 percent in 2008, 9.6 in 2009, 10.2 in 2010 and 2011, sharply up to 11.4 percent in 2012 and up again last year, to 12.1 percent.

This big-picture view shows an unrelenting economic crisis. Before we leave this level, it might be worth pointing to the plateau in unemployment in 2011. After that year, in 2012, the EU joined the ECB and the IMF in subjecting several euro-zone states to economically destructive austerity policies. Precisely as macroeconomic theory would suggest, the effects of those policies spread throughout the euro zone, sending unemployment up another couple of notches.

Thus, annual data show no sign whatsoever of a recovery. At best, we might hope that the jump in unemployment in the last two years is going to be followed by the same kind of plateau that occurred in 2010-11. The only way Europe can enter a trend of shrinking unemployment is if there is new spending going into the economy on a sustained basis. That, in turn, requires structural reforms to the European economy that I do not see any support for at this point.

Moving to a more detailed time scale, quarterly data can be sliced different ways. Looking first at the last quarter of every year back to 2010, we once again see no sign of a recovery. EU unemployment was 9.6 percent in the fourth quarter of 2009, ten percent in 2011 and has been 10.8 the fourth quarter of the past two years. Euro-zone unemployment, in turn, has been inching up all the way: 10.2 in ’09, then 10.6, 11.8 and 12.0.

Again, notice the austerity-driven bump from 2011 to 2012.

If we look at quarterly data as a series of quarters, we get a more detailed view. Here we can actually find the a weak sign of something that could turn into a recovery:

  • For the EU as a whole, unemployment increased seven quarters in a row, from 9.5 percent in the second quarter 2011 to eleven percent in the first quarter of 2013;
  • In 2013 unemployment fell marginally to 10.9 percent in the second quarter and 10.8 percent in the fourth.

The euro zone, on the other hand, saw an eight-straight-quarter rise, topping out in the second quarter of 2013 at 12.1 percent. The drop by a tenth of a percent since then is not the beginning of a trend.

The fact that the euro zone does not exhibit the same minor decline that the EU as a whole can show, is an indication that there is no emerging recovery in the EU as a whole. Instead, this is a matter of isolated reductions in non-euro zone countries such as Lithuania (-2.1 percent in 2013) and Hungary (-1.8 percent).

Moving, lastly, to monthly numbers, we start with the first month of every year back through 2009:

2009M01 2010M01 2011M01 2012M01 2013M01 2014M01
EU 8.1 9.6 9.5 10.1 11.0 10.8
Euro zone 8.7 10.2 10.0 10.8 12.0 12.0

See any downward trend? Nope. Just yet more evidence of stagnation.

But what about month-to-month? Let’s go back through 2012 and 2013 to find out:

EU Euro zone
2012M01 10.1 10.8
2012M02 10.2 10.9
2012M03 10.3 11.0
2012M04 10.4 11.2
2012M05 10.4 11.3
2012M06 10.5 11.4
2012M07 10.5 11.5
2012M08 10.6 11.5
2012M09 10.6 11.6
2012M10 10.7 11.8
2012M11 10.8 11.8
2012M12 10.9 11.9
2013M01 11.0 12.0
2013M02 11.0 12.0
2013M03 11.0 12.0
2013M04 11.0 12.1
2013M05 10.9 12.1
2013M06 10.9 12.1
2013M07 10.9 12.1
2013M08 10.9 12.1
2013M09 10.9 12.1
2013M10 10.8 12.0
2013M11 10.8 12.0
2013M12 10.8 12.0
2014M01 10.8 12.0

Long story short: unemployment numbers for the EU and the euro zone firmly establish that the European economy is in a state of stagnation. This is, again, not the least bit surprising to anyone who knows his macroeconomics: so long as there is no new spending injected into the private sector, on a sustained basis, there will be no sustained reduction in unemployment.

As depressing as that conclusion is, it is not surprising. It is the predictable fallout of the fiscal and monetary policy package in Europe over the past several years.

Obama Spends Less than Reagan

While European politicians are busy declaring the end of the economic crisis in Europe, Americans have seen their economy pick up speed for a good year now. Inflation-adjusted quarterly growth figures during 2013 actually looked encouraging: compared to the same quarter a year earlier, U.S. GDP grew, respectively, 1.3 percent, 1.6 percent, 2.0 percent and 2.7 percent.

It remains to be seen if the upward trend in growth continues through 2014. We should keep in mind that these growth numbers are from a year when Obamacare had not yet gone into effect. That law is still hanging like a Damocles sword over businesses and households, though more and more point to the entire law slowly withering away. There is also the problem with the federal government’s regulatory assembly line, which continues to fire off artillery round after artillery round of regulations at America’s businesses and entrepreneurs.

My impression is that businesses are beginning to bet on the Obamacare law to eventually go away, or at least be reduced to somewhat of an expanded Medicaid program. This would partly explain the slow but visible growth in private-sector activity in most corners of the great country. If the federal government could declare regulatory cease-fire – and chances are they will if the Republicans take the Senate in the fall – then things could get pretty good.

But there is one variable that contributes even more to the recovery – no matter how weak it is – namely the remarkable restraint in federal spending.

If you ask the next guy you meet in the mall parking lot what American president is the biggest spender of them all, chances are the answer will be “Obama”. Conventional wisdom says that Obama is a major spender of other people’s money, regardless of whether it is taxes or debt. It is easy to understand this when Obama declares that the era of austerity is over:

With the 2015 budget request, Obama will call for an end to the era of austerity that has dogged much of his presidency and to his efforts to find common ground with Republicans. Instead, the president will focus on pumping new cash into job training, early-childhood education and other programs aimed at bolstering the middle class, providing Democrats with a policy blueprint heading into the midterm elections.

When you demand more government spending, and when that spending is of the classical entitlement kind, you should not be surprised if you are characterized as the biggest spender.

Chances are, though, that Obama will not get to spend all the extra money he wants to. Once the budget gets to Congress it will meet solid resistance from Republicans, and this time around they will find lots of allies among reelection-minded Democrats.

It is entirely possible that the president knows this, and that his spending rhetoric is little more than the same kind of hot air we hear so much of in election years. In fact, it would be better for the president if his spending proposals fell flat to the ground in Congress than if he got what he wanted. So far he has a pretty good track record for federal spending: after the big mistake we all know as the American Recovery and Reinvestment Act, or the Stimulus Bill, which increased federal spending by 17.9 percent in one year, the average growth rate for Uncle Sam’s outlays has been 1.2 percent per year. (It is 4.8 percent per year if we include the stimulus year of 2009.)

Some, like Dan Mitchell over at the Cato Institute, rightly make the point that the restraint in spending coincides with the Tea Party movement making inroads into the Republican caucus on Capitol Hill. But in addition to that Obama seems to have been fine with almost flat spending. Whatever his reasons, he deserves recognition for having shown this restraint.

One possibility is that the president knows that if he would allow the federal deficit to spin completely out of control, as it was beginning to do back in 2009 and 2010, his entire legacy would be overshadowed by that. More importantly, it is easier to get Congress to focus on other issues than the deficit if the deficit is shrinking.

According to the Office of the Management of the Budget, 2013 represents the first year under Obama when the federal deficit will be less than a trillion dollars. So far that is only an estimate, but if the current trend continues, then by 2018 the deficit will be back at 2005-2006 levels.

In all, this positive deficit trend helps reinforce confidence in the U.S. economy. It also helps ease the pressure on interest rates that in 2013 pushed U.S. Treasury Bonds higher than some European countries. As the budget deficit declines, Federal Reserve chairwoman Janet Yellen will get a good opportunity to phase out the Quantitative Easing program. Some people already expect this to happen, which contributes to a reduction in inflation expectations and strengthened confidence in the U.S. dollar.

All this together helps the economy continue its slow but visible recovery.

However, even if Obama works with Congress to keep a tight leash on federal spending we are eventually going to see federal spending increase again. In fairness, it is already happening to some degree: the OMB estimate for 2013 is that spending went up by 4.2 percent; for the remaining three years of Obama’s presidency the OMB predicts an average of 3.5 percent per year.

For his entire presidency, Obama would then average 4.2 percent per year in spending increases. Deducted the one-time spike in 2009 his average would fall to an exceptionally good 2.2 percent, but even with that included – as it should be – he will retire with a far better spending record than his predecessor. Over his eight years in office, George W Bush presided over a budget that grew, on average, by 6.6 percent per year, with the second term seeing faster spending increases than the first (6.8 vs. 6.4).

Bill Clinton beats them both. Working as he did with a Republican-controlled Congress, he kept the federal budget growing at a respectably low 3.3 percent per year. Reagan, by contrast, joined the Democrat majority in Congress and expanded spending by an annual average of 7.7 percent per year.

Based on these historical numbers, the best outlook for federal spending restraint is therefore that the Republicans take the Senate in November and Obama drops his demands for more entitlement spending. If he kept spending completely flat in his last two years in office he would actually beat Clinton by a tiny margin for the most spending-frugal president in recent history.

The chances of that happening are not good, though. The federal budget is driven by an enormous system of entitlement programs. Some are entirely federally funded, costing taxpayers $1.8 trillion per year; other programs are co-funded with the states and add almost half a trillion dollars in federal spending. These programs not only cost a lot as they are, but they often have spending parameters built into them that cause spending to rise automatically.

Consider this chart:

BOspendChart1 Source: Financial Accounts of the United States, Federal Reserve; and the Office of the Management of the Budget.

Take a look at the blue spending trajectory from 1995 to 2010. It illustrates the accelerating average annual spending during the Clinton and Bush presidencies.

In five out of Bush’s eight years in office, federal spending grew at more than seven percent per year. Even if some of the spending increases under Bush were related to the military build-up, the underlying trend of faster growing spending was driven by ever costlier, ever more generous entitlement programs.

Obama is not the big spending problem in Washington, DC. The big spender is the welfare state.

Saving the Greek Welfare State

The welfare state crisis in Europe puts two acute problems on full display:

1. Big, redistributive government is killing prosperity in the developed world – it is high time to terminate it; and

2. That same big, redistributive government has trapped large segments of Europe’s population in a destructive dependency on government.

These two problems point to the same long-term solution, namely an end to the welfare state. At the same time, the wrong kind of termination will cause enormous harm to the hundreds of millions of Europeans who depend on government for their daily lives. The only way out is therefore to end the welfare state along a path to limited government that does not leave the poor behind.

Not everyone agrees on the need to follow that path. The idea that we should “just cut spending damn it” still has a large following, both among European economists of an Austrian slant and among American libertarians. This is surprising, especially since their slash-and-burn approach to the welfare state has already been tried in Europe. A couple of days ago the medical journal The Lancet reported on what this has meant to the Greek health care system:

Two main strategies can reduce [budget] deficits in the short term: cutting of spending and raising of revenue. The Greek Government used both at the behest of the Troika, albeit with an emphasis on reduction of public expenditure. … Cuts to public health spending Greece has been an outlier in the scale of cutbacks to the health sector across Europe. In health, the key objective of the reforms was to reduce, rapidly and drastically, public expenditure by capping it at 6% of GDP. To meet this threshold, stipulated in Greece’s bailout agreement, public spending for health is now less than any of the other pre-2004 European Union members.

The writers for The Lancet do not possess the expertise to realize that austerity as applied in Greece actually aims at saving the welfare state. The spending cuts and the tax increases are displays of a concerted – and very destructive – effort to slim-fit the welfare state into a smaller economy.

Nor do they seem to understand that in the short run it does not matter much whether austerity emphasizes tax hikes or spending cuts. (In the long run the balance between the two can make a notable difference. I elaborate on this point in my upcoming book Industrial Poverty.) At the massive scale that austerity has been put to work in Greece, a tax-hike laden policy strategy would have done at least as much damage to the Greek economy – and thereby to the government-run health care system – as the policies actually implemented.

But be that as it may. Let’s go back and listen to their story:

In 2012, in an effort to achieve specific targets, the Greek Government surpassed the Troika’s demands for cuts in hospital operating costs and pharmaceutical spending. The former Minister of Health, Andreas Loverdos, admitted that “the Greek public administration…uses butcher’s knives [to achieve the cuts].” The negative effects of these cuts are already beginning to manifest. Prevention and treatment programmes for illicit drug use faced large cuts, at a time of increasing need associated with economic hardship. In 2009–10, the first year of austerity, a third of the street work programmes were cut because of scarcity of funding, despite a documented rise in the prevalence of heroin use. At the same time, the number of syringes and condoms distributed to drug users fell by 10% and 24%, respectively. These events had the expected eff ects on the health of this vulnerable population; the number of new HIV infections among injecting drug users rose from 15 in 2009 to 484 in 2012 and preliminary data for 2013 suggest that the incidence of tuberculosis among this population has more than doubled compared with 2012.

This is an excellent example of why government should not be involved in the health care business in the first place. Legislators have taken over the responsibility for caring for drug addicts – and done so based on one particular ideology, namely that it is the right thing to do to give them free drug paraphernalia. By taking over the provision of said paraphernalia, government crowds out any initiative in the private sector to either provide the same products or to care for the drug addicts in some other way.

Then, when government runs into serious fiscal trouble and has to cut or terminate the programs it has put in place, there is nobody there to catch those who have become critically dependent on government.

Fortunately, there is a way out of this. We’ll get back to it in a minute. Now, more from The Lancet:

Additionally, drastic reductions to municipality budgets have led to a scaling back of several activities (eg, mosquito-spraying programmes), which, in combination with other factors, has allowed the re-emergence of locally transmitted malaria for the first time in 40 years. Through a series of austerity measures, the public hospital budget was reduced by 26% between 2009 and 2011, a substantial drop in view of the fact that expenditure should have increased through automatic stabilisers. … Rural areas have particular difficulties, with shortages of medicines and medical equipment. Another key cost targeted by the Troika was publicly funded pharmaceutical expenditure … The stated aim was to reduce spending from €4·37 billion in 2010 to €2·88 billion in 2012 (this target was met), and to €2 billion by 2014. However, there have been many unintended results and some medicines have become unobtainable because of delays in reimbursement for pharmacies, which are building up unsustainable debts. Many patients must now pay up front and wait for subsequent reimbursement by the insurance fund.

It is very important to understand how the welfare state works. By providing entitlements such as the subsidies in Greece for prescription drugs, it makes people adjust their lives, their spending habits, their entire private finances, to the existence of these entitlements. Furthermore, the taxes needed to pay for these entitlements severely restrict their opportunities to set aside money for alternatives in the event the entitlements are terminated.

The more entitlements government offers, the more people adjust their lives to those entitlements – and to the taxes that pay for them. There comes a critical point where government, by means of its welfare state, essentially monopolizes the way of life people can have. This makes the damage done by austerity all the more widespread through the economy.

When people lose access to the entitlements they relied on, they have to cut spending elsewhere to get what government once provided for free or at a heavy subsidy. This reduces spending in the private sector, forcing small businesses in, e.g., retail to slash employees.

The key problem here is not the spending cut, but the fact that it is paired with either constant or higher taxes. In Greece, government raised taxes while slashing spending – the same recipe applied all over Europe as far back as Sweden in the early ‘90s and Denmark in the ‘80s – which effectively creates a big drainage of resources from the private sector into government coffers. However, since government is not spending more, but less, the net effect is a decline both in government spending and in private-sector activity.

If on the other hand spending cuts are combined with tax cuts, and if those tax cuts are targeted to maximize the benefit to those losing the most from entitlement cuts, then the private sector has a fighting chance to step in and replace government. Once they are out of government dependency, obviously people will be able to handle health care costs with the ups and downs in their private finances in the same way as they today handle the costs of housing, feeding, clothing and transporting themselves around.

But that is not what the Europeans have in mind. This kind of government rollback is nowhere on their horizon. For this reason, we are going to hear more stories out of Europe, like the one we are listening to from The Lancet:

Findings from a study in Achaia province showed that 70% of respondents said they had insufficient income to purchase the drugs prescribed by their doctors. Pharmaceutical companies have reduced supplies because of unpaid bills and low profits. Despite the rhetoric of “maintaining universal access and improving the quality of care delivery” in Greece’s bailout agreement, several policies shifted costs to patients, leading to reductions in health-care access. In 2011, user fees were increased from €3 to €5 for outpatient visits (with some exemptions for vulnerable groups), and co-payments for certain medicines have increased by 10% or more dependent on the disease. New fees for prescriptions (€1 per prescription) came into effect in 2014. An additional fee of €25 for inpatient admission was introduced in January 2014, but was rolled back within a week after mounting public and parliamentary pressure. Additional hidden costs—eg, increases in the price of telephone calls to schedule appointments with doctors—have also created barriers to access.

These fees may not sound like much, but we have to remember that they are imposed on an economy where people have lost 25 percent of their total gross incomes in five short years, where unemployment is three times the U.S. level and where other costs of living, primarily taxes, have gone up. Government is still claiming a monopoly on providing health care, trapping people in an ever more austere system with no way to get to the alternatives.

Then The Lancet makes an observation that, so far, this blog has been almost entirely the only voice for:

If the policies adopted had actually improved the economy, then the consequences for health might be a price worth paying. However, the deep cuts have actually had negative economic eff ects, as acknowledged by the International Monetary Fund. GDP fell sharply and unemployment skyrocketed as a result of the economic austerity measures, which posed additional health risks to the population through deterioration of socioeconomic factors.

In other words, if austerity was a good idea, the Greek economy should be rip-roaring by now instead of, as The Lancet notes in conclusion, having to suffer through yet more of the same policies:

At the time of writing, the Troika was in Athens to assess the implementation of the bailout conditions, and €2·66 billion in cuts were announced to the health and social security budget for the following year.

Austerity is nothing more than an attempt at saving the welfare state from a crisis it caused. Nothing short of a real government rollback – a structural phase-out of the welfare state – is going to work. That holds true for Europe as well as the United States.

Tax Hikes in Sweden a Bad Idea

The Swedish Treasury secretary, Anders Borg, has been in office now for seven years. He is one of the longest lasting masters of government funds in the free world. I’ve had a lot of criticism for him over the years, but I also want to acknowledge that he has done some things right, at least given the circumstances.

Mr. Borg came into office after the 2006 parliamentary election, and was very soon hurled into the Great Recession. I really don’t envy his job: Swedish law mandates that the government prioritizes a balanced budget, annually, above all other economic policy goals. This is an easy priority to comply with in good times, but once a recession strikes government revenue takes a nose dive. In the elaborate European welfare states, government spending increases precisely when revenue declines. In other words, government budgets are built to open major deficits in recessions.

Like all other Treasury secretaries in a similar situation, Mr. Borg chose to fight the deficit. Early on, his fiscal policy was clumsy and came with ill-conceived spending cuts. His budgets were poorly written, sometimes with outright embarrassing analytical flaws. Over time, though, things got better on the analytical side and Mr. Borg persisted in pushing for a Swedish version of the Earned Income Tax Credit. As I explain at length in a chapter in my book Ending the Welfare State, the EITC is an inefficient way of cutting people’s tax burdens, primarily because it creates very steep marginal tax effects for low-income families. That said, in a country that has a history of having the world’s highest taxes it is better to introduce an EITC of sorts than to do nothing.

In the last year or two Mr. Borg has taken yet another step toward a more comprehensive fiscal policy. He has cited Keynesian theory as the source of inspiration for his fiscal policy. Last year he emphasized, several times, the need for fiscal stimulus to get the Swedish economy going. He pointed to a further expansion of the Swedish EITC as an example.

Today Mr. Borg still abides by a crude, textbook version of the Keynesian-Neoclassical synthesis. He still wants to counter swings in the business cycle with active, stabilizing fiscal policy. There is nothing wrong in this, except for two things: Mr. Borg is still determined to defend the indefensible welfare state – and you would have to accept the fact that Sweden is now out of its recession and heading for some kind of macroeconomic over-heating.

Leaving the indefensibility of the welfare state aside for now, the notion that Sweden is in a growth period is of bigger interest than it might seem at first. In claiming that he sees a recovery in the economy, Mr. Borg echoes similar sentiments from Eurocrats in Brussels. But just as it is wrong to say that Greece is on a macroeconomic rebound, it is simply bizarre to say that Sweden is out of the recession.

Let us look at some data from Eurostat to see where Sweden really is today:

  • The Swedish unemployment rate is currently reported by Swedish statistical agencies as 7.7 percent. According to Eurostat it has been at eight percent since 2010 with no real trend in either direction.
  • Youth unemployment is also trendless. After topping out at 26.7 percent during the crisis it is now steady around 24 percent.
  • GDP growth is equally unimpressive. In the third quarter of 2013 the Swedish economy grew by 0.7 percent over the same quarter in 2012. The average annual growth rate for the last four quarters is 0.8 percent.

These are not numbers that indicate any kind of over-heating in an economy. There is not even a hint of recovery here. Okun’s law says that an economy needs to grow at more than two percent per year to bring down unemployment; so far, the Swedish economy cannot even get to half that rate.

The only variable with any kind of positive trend is private consumption. In the third quarter of 2013 Swedish households increased their spending by 2.1 percent, adjusted for inflation, over the same quarter in 2012. This was the fifth quarter in a row with accelerating consumption growth, which could be taken as a sign of economic recovery. However, if we remove spending on housing from these numbers the average growth rate declines to approximately European average. The reason why we need to make this adjustment is that Swedish households are spending exceptional amounts on housing: there is practically no production of new homes, and population growth is among the highest in the industrialized world (due to large immigration from non-Western countries). As a result, Swedish households have been forced to basically mortgage the rest of their lives, with debt-to-disposable-income ratios in excess of 180 percent. By comparison, when the American housing bubble burst in 2008, the average U.S. household had a debt of 130 percent of their disposable income.

In short: what seems like a trend of recovery in Sweden’s private consumption is in reality a debt-driven housing spending spree. It cannot and will not bring the economy back to growth.

The saddest part of this is that Mr. Borg wants to quell an overheated economy that does not exist, by raising taxes. All that this will do is perpetuate the current situation with high unemployment, almost no growth – and dangerously indebted households. In fact, by raising taxes Mr. Borg could provoke an acute debt crisis: by taking more from the private sector he raises the likelihood that private disposable income will cease to grow in the next year or two. As this happens, the ratio of household debt to disposable income will rise again, but since it is now the denominator that is stagnating, the risk of bank panic is higher than if the numerator was accelerating.

In short: Mr. Borg could provoke a meltdown on the Swedish real estate market.

Again, I applaud Mr. Borg for wanting to build his fiscal policy on an analytical foundation. His problem is that he does not give himself enough time to do the analysis (and he certainly does not have access to adequate brainpower at the Treasury Department in Stockholm…). A growth period in need of any kind of fiscal-policy moderation would look more like the Swedish economy in the 1980s when unemployment was at two percent.

Yes, two percent.

In a way, the fact that Mr. Borg does not want to wait for full employment before he takes to growth-quelling policy measures is an indication of how the past couple of decades have changed people’s perception of the macroeconomic normal. This is not just the case in Sweden, but in Europe in general.

We have to watch out here in the United States so we don’t fall for the same illusion.