Jeff Madrick

Roosevelt Institute Senior Fellow and Director of the Rediscovering Government Initiative
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Recent Posts by Jeff Madrick

  • Germany's Attempt to Beat Greece into Submission Won't Work

    May 9, 2012Jeff Madrick

    Treating Greece like an incorrigible child won't improve its economy or the future of the eurozone.

    Treating Greece like an incorrigible child won't improve its economy or the future of the eurozone.

    “German Patience with Greece Wears Thin,” says the New York Times headline. My patience with the mainstream media also wears thin. Like a bad parent, Germany scolds Greece for something its constant beatings basically forced it to do. The media buys into Germany's logic. Were high-pressure tactics to adopt punishing austerity cutbacks ever going to encourage Greek solidarity and social peace? Is the parent who beats the child ever going to encourage obedience and healthy behavior? Psychology has taken us a long way past the value of spankings to instill constructive attitudes. It seems not so for the Germans, although it should be said that not all of them agree with their prime minister, Angela Merkel, and government officials.

    Are the Germans actually trying to get Greece to leave the euro? If so, they are probably underestimating the turmoil that would cause. On the other hand, it may be getting to the point where it is a better option for the Greeks to incur the possible closing of financial markets should they adopt a new drachma, which will quickly fall in value. They will not pay their debts to German banks and others in full-fledged euros. But they can start to determine their own fate and work with what industries they have. Their export sector is not as weak as people seem to think. 

    Germany's basic refusal to take responsibility for its contribution to this situation continues to be stunning. First, it exploits a fixed euro that is too low given its competitiveness—much like the Chinese do and the Japanese did before them. Then its banks lend willy-nilly to the nations who are buying its exports, disregarding the quality of the loans and prospective inflation. (The Chinese similarly buy U.S. debt.) Third, it demands harsh cutbacks in Greece if the bad boys want money to pay their loans back. Which makes matters worse. Across the nations that have adopted austerity, debt as a proportion of GDP is higher than it was during the recession.   

    Spanking doesn’t work. Calling Greeks irresponsible time and again doesn’t work. It is also only partly true. Not all Greeks lied about their former finances, only the right-wing party in power at the time did. The Greeks work hard and they work many hours a week.

    But the angry reaction to austerity is utterly, laughably predictable. To act as if the Germans have done everything right and the Greeks everything wrong is preposterous. When the media give credibility to these insinuations and implications, they should be called to task. We are suffering the worst economic leadership among rich countries in our lifetime. The Germans responsible should not be proud to be head of this class.

    And, by the way, a letter in today’s Financial Times rightly points out that many Germans are voting in increasing numbers against the Merkel-esque politicians. It is not all Germany's fault, just like it is not all Greece’s. And there are ways out, as I have discussed in this space many times.

    Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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  • Rediscovering Government

    A Message to World Leaders: Ignore the Financial Markets

    May 7, 2012Jeff Madrick

    A solution for the eurozone? Listen to the people, not to the markets.

    For 40 years, there has been a tug of war between government in democracies and what we may call “the other government.” By the latter I mean, of course, the financial markets. James Carville highlighted his concerns when he announced that in the next life he would want to be a bond trader. Alan Greenspan followed the bond markets religiously for signs of increased or reduced inflationary expectations.

    A solution for the eurozone? Listen to the people, not to the markets.

    For 40 years, there has been a tug of war between government in democracies and what we may call “the other government.” By the latter I mean, of course, the financial markets. James Carville highlighted his concerns when he announced that in the next life he would want to be a bond trader. Alan Greenspan followed the bond markets religiously for signs of increased or reduced inflationary expectations.

    Now Europe faces the threat of a financial market rebellion. Democracy has spoken loudly in this weekend’s elections on the Continent and in England. Voters said, "We have had all the austerity economics we can take."  They threw over Sarkozy in France and many Conservative and Liberal candidates in England. In Greece they ran for the extremes. The moderate liberal Pasok party won the least votes in memory, but it may yet form a coalition to run a new government. Italian election results will be in soon.

    And democracy is working! The instinct among those in the financial markets is that democracy usually reflects the weak-willed demands of the public. But the public is generally right this time, and it has been many times before. Austerity economics is self-destructive when economies are so weak.   

    Yet of course the financial markets’ initial reaction to the European elections was to sell, as if austerity economics was actually working to make nations' bond payments easier to handle. It was not! But the markets fear that a new strategy will make matters worse.

    Political leaders should ignore the financial markets in the short run, pure and simple. This may drive up financing costs for a while, but the eurozone should absorb those and adjust policies. The European Central Bank (ECB) ought to accommodate its needs. The right policies are stimulus from the current account countries and the end of extreme austerity in the periphery. Wages should rise in the eurozone core and stabilize in the periphery; they can even rise from their current lows in places like Greece. The 17-nation Eurozone or the 27-nation EU should issue jointly backed bonds to provide social safety net support to the financially weak nations, to raise demand for them and get their economies going, while reducing the extreme financial pain and sacrifice that now jeopardize social stability. As examples, the Greeks voted for extremist parties, the Le Pen party did well in France, and the Tea Party runs amok in the U.S. Austerity fever even grips Washington, which makes the November election especially important.

    What the crisis requires is elected government, not bond trader government. Any idea that the financial markets are rational should have been discarded four years ago. They have been absurdly wrong for decades. In the U.S., they persistently overestimated future inflation by driving interest rates too high compared to the CPI and the GDP deflator. Greenspan treated them as the height of rational forecasting, when indeed they were simply following the latest conventional wisdom. In my informal opinion, he used long-term rates as a guide to policy. Now the ECB remains too tight as well. In the U.S., the “rational” bond traders actually traded what they thought the market would think, rather than what rational foretellers of the future would think. It was Keynes’ beauty contest analogy—choose the woman you think others believe is beautiful. The belief that the markets were right was the fallout of extreme efficient markets theory.

    The media too often treated the markets as rational as well. Bond traders implicitly endorsed austerity economics until fairly recently, and the media usually reported them as being right. The supposedly sophisticated financial media (with some noted columnists as exceptions) wondered what could possibly work if not austerity. Now there are signs that the press is waking up to reality and realizing that it, along with the financial markets, is not working.

    There are some signs of the ice breaking. The German finance minister announced it was okay for German wages to rise. They have actively restrained wage growth to make their exports more competitive for over ten years. The main sources of their demand were the European periphery, where wages were rising a bit due to a property bubble caused by irrationally low interest rates offered in the financial markets. But there are still signs of backward thinking. Many in Europe think of growth policies as nothing more than making labor markets more competitive through deregulation and reduced wages. As if the more flexible labor markets in the U.S. are leading to rapid recovery.

    In sum, what’s needed in Europe is fiscal stimulus, a more accommodative ECB, social transfers from rich states, higher wages in many nations, a change in the silly EU agreement to keep deficits absurdly low, and industrial policy to gear capital investment across the continent, free of prejudice and nationalistic tendencies. The elections may bring some of this about. Then, once policies are working to support growth and reduce financial burdens as tax revenues rise, the financial markets will at last respond constructively. They must be waited out for now.

    To put it most simply, what’s needed is the will of the government of the people to ignore the financial markets and stop treating them like a more rational government than democracy itself.   

    Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

    Banner image courtesy of Shutterstock.com.

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  • The Future of the Economy Will Be Decided on Election Day

    May 4, 2012Jeff Madrick

    The future of the recovery is still in doubt, and it all depends on which economic doctrine comes out on top on November 6th.

    The future of the recovery is still in doubt, and it all depends on which economic doctrine comes out on top on November 6th.

    Today’s jobs data from the Labor Department were disappointing but not a disaster — at least not yet. The creation of 115,000 jobs is not adequate to bring the unemployment rate down consistently. The drop in that rate to 8.1 percent had to do with people leaving the workforce, not the creation of an adequate number of jobs. Contrary to what is widely written, however, the numbers do not necessarily mean the economy is slowing down. There is probably now a problem with the seasonal adjustments. Something has changed, and the most likely culprit is the warmer-than-usual weather.

    The seasonal adjustments probably inflated the data on growth earlier in the year and are probably deflating it some now. We are likely growing at a pretty even pace, not slowing down significantly. Let’s not forget that recoveries do have a momentum of their own, and manufacturing is making something of a comeback. There is also some notable rundown in consumer leverage.

    This is good news, but not good enough. The pace is still too slow. By now we all know about the headwind of consumer debt and lack of adequate mortgage relief. That leverage is not being diminished fast enough, and it is likely as the Obama stimulus fully peters out that there will be ongoing government contraction — especially as state and local governments continue to cut back.

    It would be nice to see Washington pay some attention to this potentially serious weakness — along with two other factors. The first is continued recession in Europe, which in turn will weaken its finances further. Austerity has been the disaster we long warned about. The U.S. sells to Europe and it owes us money, not least our money market funds.

    Second, a bunch of significant contractionary policy matters come to a head at the end of the year. The Bush tax cuts end, as do emergency unemployment benefits, the payroll tax cut expires, and Congress is supposed to implement $1.2 trillion in spending cuts because the Super Committee failed to agree on its own cuts.

    Many have written about this “cliff” and understand nothing will be done until after the election, which leaves less than two months to do anything. Most think there will be some kind of postponement of the issues by Congress because there won’t be enough time to do anything substantive. But then what? Much will depend on the election outcome.

    So much attention has been given to deficit reduction in the U.S., and by the Obama administration until only last fall, that we are now in a dangerous rut. We need fiscal stimulus and we are not going to get it. The economy is hardly strong and can be easily toppled into a new recession. Then deficit projections get still worse. It's hard to be optimistic in this environment. I believe the Obama administration took its eye off the ball since the start. The focus should have been jobs, and I don’t think the attention paid to health care legislation was a sufficient excuse. They would have missed the ball anyway.

    But given the nation’s current straits, this November’s election is one of the most important elections of our lifetime. If it goes well, jobs and growth have to be at the top of the agenda, not deficit issues. An Obama loss means austerity and recession again. Budget cuts will be demanded at the expense of the elderly, the poor, and the new health care bill. If Obama wins but Democrats lose the Senate, it will be significantly better but not a panacea. Muddling through, which is what we’d get, may also mean recession.

    A Democratic victory in the House and a filibuster-proof Senate would be too grand to bank on, but not impossible. Even then, it would all depend on aggressive leadership by Obama that favors growth. Fiscal responsibility can come later.

    Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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  • Rediscovering Government

    The Path to a Stronger Democracy Lies in Strengthening Community

    Apr 24, 2012Jeff Madrick

    Two new books examine how putting capitalism before community has distorted the economy and put democracy at risk.

    Two new books examine how putting capitalism before community has distorted the economy and put democracy at risk.

    I participated in a panel discussion last week to help launch The Occupy Handbook, in which I and about 60 others made contributions. It was mostly composed of economists and mainstream journalists, and the focus was income inequality. One wouldn’t expect anything much different from a discussion of Occupy Wall Street, which after all made “the 1 percent” a household tag line for what is unfair about the American economy.

    But OWS is actually raising broader issues than that, and my sense in talking to a few early organizers is that they can’t seem to find answers to their questions. Granted, most of these questions are not entirely well formed as yet, but the economists’ view, it must be admitted, is a rather narrow one. Correcting inequality a bit and regulating Wall Street some are flimsy palliatives in the organizers' minds, I suspect. Even infrastructure investment sounds like a weak corrective to them. Do we never question the intense idealism of the Anglo-American economic model?

    The Occupy Handbook is actually a fine, diverse, and sometimes contradictory set of contributions put together with remarkable speed by editor Janet Byrne. For example, it includes a couple of pieces by well informed anarchists and others by those to the right of center who believe America’s answer is better education (and that’s about it). Many concede OWS's contribution to the nation is awareness. There is no sound in American politics unless Washington is listening, I wrote. OWS got them to listen.

    But there is another small book out just today that does propose rather serious alternative to the individualist/materialist American model of economics. It is called The Path to Hope, and it is written by two former French Resistance veterans who are now in their 90s. Stephane Hessel wrote Time for Outrage! a couple of years ago, a pamphlet of political anger—a cri de coeur—that called for public protest. It swept the world, selling millions, and was said to have a profound influence on the Spanish indignados and the Arab Spring. Now he has teamed up with the eminent sociologist, Edgar Morin, to put a little more meat on the bones of their rage.

    I proudly wrote the prologue to the book -- proudly because, if highly rhetorical and abstract, their brief piece talks about much that is forgotten in the governance of nations and the true interactive meaning of democracy. I usually draw two circles in the air when I speak about these issues. One is the circle of free markets, defined by Milton Friedman, who basically argued in Capitalism and Freedom that left to themselves, markets can produce social goods more fairly and cheaply than government—from retirement security to highways to health care.

    The other circle is community, which has long been the source of social goods in which people care for each other. Friedman’s circle is individualist. This circle is the circle of Hessel and Morin. It is the circle of compassion and community. Being American, I suppose, I tend to believe the circles should be of equal size. Since the 1970s, our potential tragedy is that the Friedman circle has gotten immense while the community circle has shrunk.

    Hessel and Morin would argue that the community circle should be far larger than the Friedman circle. They are not pure anti-capitalists; they hold a significant place for business. But they say enough is enough. We have seen the power of finance capitalism to distort and undermine productive growth and equal opportunity. We are also witnessing the rise in Europe of ethnic bigotry again. This, they demand, must change.

    In writing the prologue to The Path to Hope, I acknowledge that I don’t agree with all that Hessel and Morin write. They offer but an outline of high ideals of community and fellowship. But they are on the right track. They saw the rise of pure totalitarianism and they worry that if the fortunes of the rich are again threatened, they may side with those who would plunder democracy. I don’t think we are nearly there yet, but democracy in America is threatened and warped by financial power these days. We do care too little about each other, I fear. The Path to Hope is on sale now.

    Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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  • French Voters Counter Austerity with Democracy

    Apr 23, 2012Jeff Madrick

    Austerity policies are the last thing Europe's economy needs, and voters are making sure their leaders get the message.

    Can democracy be raising its wonderful, if often lazy, head in Europe? Too often there is skepticism that democracy itself -- the will of the people -- can lead to wise economic decisions and that the American founding fathers were all fearful of the rule of the masses. I have long held the opposite view.

    Austerity policies are the last thing Europe's economy needs, and voters are making sure their leaders get the message.

    Can democracy be raising its wonderful, if often lazy, head in Europe? Too often there is skepticism that democracy itself -- the will of the people -- can lead to wise economic decisions and that the American founding fathers were all fearful of the rule of the masses. I have long held the opposite view.

    We all know examples of populist uprisings that have failed. The French Revolution was hardly an adulterated success. Populism in the U.S. in the 19th century led to many an ugly idea and many a bad economic solution.

    But democracy creates demands for more equal wages, for social goods that reinstate confidence in a nation, and for the spread of opportunity. Democracy often also demands rights for minorities. It was democracy in America that fostered progressive income taxes, Social Security, Medicare, and government financing of education and roads. In my view, equal and strong wages are a source of growth, not a disadvantage that reduces profits as many orthodox economists see it. There is no growth without adequate demand. After 40 years of neglecting this basic idea, it is making a comeback.    

    Now the people of France may be saying they have had it with austerity. They may well vote out Sarkozy in favor of the Social Democrat Francois Hollande. Hollande beat Sarkozy in the first run-off and, according to the pundits, is likely to win the two-person run-off in two weeks. And Hollande is running an anti-austerity and anti-big finance campaign, if a mild one. Can this break the ice and reverse the trend toward austerity? One former European leader I spoke to thinks it could.

    But there is more than just a reaction against austerity in France. The Netherlands is dealing with a backlash against its austerity programs, and the Dutch have been stalwart supporters of German single-mindedness on this issue. The prime minister felt obliged to resign. Even in Germany, the Social Democrats who are increasingly voicing concerns with Angela Merkel’s policies will gain more confidence. There are left-wing soundings in Spain as well.

    All this is refreshing and highly welcome. Austerity policies are dead wrong for Europe right now. It is sliding into serious recession, and it may eventually upset the fragile U.S. recovery. The rebelling left is correct about economic policy, even if it is most motivated by economic justice. Could democracy and justice be policies for prosperity? Start believing again.

    The French election, however, provided another reason to end austerity. The extreme right of Le Pen received one out of five votes -- a major victory. In times of economic adversity, anger toward ethnic minorities like Muslims only rises. Deep recession is the fertile ground of totalitarisnm and bigotry. All the more reason to reject austerity and shake up Euriope.

    How naïve, you say. The financial markets already gave their answer. They are selling everything except German bonds, it seems. That is a first blush reaction, of course. And many, including American business reporters, will say that this shows how silly the French are to think they can buck the austerity approach. Of course the U.S. did buck it, and if not growing with abandon, is recovering. The British adopted austerity, and despite a falling pound that has stimulated exports as well as a very loose moentary policy, its economy is floundering. What are the markets talking about?

    If only the financial markets were as wise as the people can be. But that is my ace in the hole. I think even bond traders have begun to understand that austerity is now self-defeating. What they may be most nervous about is a serious political break in the eurozone that forestalls more advances of credit to the struggling nations and any chance to develop Eurobonds to supply social transfers to ease the burden on the periphery. But austerity is not the answer. The more governments cut, the further away move the goal posts for fiscal balance. Many more policy moves are required, but at least this is a start. Who knows? The markets may even rebound some this week.

    Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

     

    Image courtesy of Shutterstock.com.

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