Joseph Stiglitz has a solution for the euro. You can read it at:
Does it involve saving the euro, too?
BY JOSEPH E. STIGLITZ, AUGUST 8, 2016
It is a pretty good article, because it says much the same thing I’ve been saying for 15 years. (That’s my criterion for “good.”)
But it comes to a rather strange conclusion, which I’ll discuss.
Here are some excerpts from Stiglitz’s article:
The world has been bombarded with depressing news from Europe. Greece is in a depression, with half of its youth unemployed.
The extreme right has made large gains in France.
In Catalonia, the region surrounding Barcelona, a majority of those elected to the regional parliament support independence from Spain.
Large parts of Europe face a lost decade, with G.D.P. per capita lower than it was before the global financial crisis.
Even what Europe celebrates as a success signifies a failure: Spain’s unemployment rate has fallen from 26 percent, in 2013, to 20 percent at the beginning of 2016.
But nearly one out of two young people remain unemployed, and the unemployment rate would be even higher if so many of its most talented young workers had not left the country to look for jobs elsewhere.
As I said in a speech at the University of Missouri, Kansas City, way back in 2005, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.
There is a simple answer to this apparent puzzle: a fatal decision, in 1992, to adopt a single currency without providing for the institutions that would make it work. Good currency arrangements cannot ensure prosperity, but flawed currency arrangements can lead to recessions and depressions.
And among the kinds of currency arrangements that have long been associated with recessions and depressions are currency pegs, where the value of one country’s currency is fixed relative to another or relative to a commodity.
America’s depression at the end of the 19th century was linked to the gold standard, where every country pegged its currency’s value to gold and, therefore, implicitly to one another’s currencies.
The gold standard is widely blamed for its role in deepening and prolonging the Great Depression. Those countries that abandoned the gold standard early recovered more quickly.
In spite of this history, Europe decided to tie itself together with a single currency—creating within Europe the same kind of rigidity that the gold standard had inflicted on the world.
The gold standard failed, and, other than a few blinkered diehards known as “gold bugs,” no one wants to see it restored.
Correct. Gold standards benefit only those who make a living buying and selling gold (See: The Daily Bell and Comment #1, below).
For nations, gold standards are disasters, quickly abandoned as soon as recession looms (at just the time when gold standards supposedly create stability).
The eurozone was flawed at birth. A single currency entails a fixed exchange rate among the member countries as well as a single interest rate.
And therein lies the problem. Each nation has a unique set of economic problems.
Yet each nation is constrained from solving their unique problems by the requirement to do what every other nation does — or more accurately, what the EU wants done.
A small country in Europe could, for instance, be in a recession when the rest of Europe is doing well.
If there were a eurozone institution that lent it money at low interest rates so it could finance investment projects, it would stimulate the economy now, even as it provided the foundations for future growth.
This borrowing might help in the short term, but that “small country” would still be in debt to the eurozone institution, with no means to create the euros to pay the debt — which is exactly what has been happening since 2008.
With strong constraints on deficit spending, the individual countries were given insufficient flexibility in the conduct of their fiscal policy—their ability to tax and spend—to enable a country facing adverse circumstances to avoid a deep recession.
Correct. The constraint on deficit spending, aka “austerity,” is perhaps the worst economic idea ever advanced. It is a guarantee of recession — though made necessary for the euro nations by their inability to create euros.
Worse still, the structure of the eurozone built in certain ideas about what was required for economic success—for instance, that the central bank should focus on inflation, as opposed to the mandate of the Federal Reserve, in the United States, which incorporates unemployment, growth, and stability as well.
Wrong. The mission of the central bank in the eurozone should be substantially different from the mission of the U.S. Federal Reserve Bank.
In the eurozone, the EU controls both the Supply and the Demand for euros.
In the U.S., Congress creates many dollars by deficit spending. The primary economic function of the Fed should be to control the Demand for dollars, while Congress controls the Supply.
Where the U.S. gets in economic trouble is when Congress relies on the Fed to control the Supply of dollars, as well as the Demand. The Fed easily controls Demand with interest rate control, but has no real tools to control Supply. (Quantitative Easing is a phony tool, made to look like the Fed is “doing something”)
Then, as a last resort to get us out of recessions it caused, Congress does what it should have been doing all along: Deficit spend to add to the Supply of dollars.
Even granting the zone’s flawed structure, there were choices to be made. Europe made the wrong ones. It imposed austerity—excessive cutbacks in government expenditures.
While austerity is imposed on the euro nations, no such limitation exists for the EU itself. It can create all the euros it needs, any time it needs them.
Thus the wealthy EU bankers are kings, doling out alms to the begging and powerless peasant euro nations.
There is a way forward: adopting a “flexible euro.”
The flexible euro would create a system in which different countries (or groups of countries) could each have their own euro.
The value of the different euros would fluctuate, but within bounds that the policies of the eurozone itself would affect.
Over time, perhaps, with the evolution of sufficient solidarity, those bounds could be reduced, and eventually, the goal of a single currency set forth in the Maastricht Treaty of 1992 would be achieved.
But this time, with the requisite institutions in place, the single currency might actually achieve its goals of promoting prosperity, European solidarity, and political integration.
I won’t go into technical detail here about how a flexible euro would work in practice.
This is where it gets funky.
I don’t blame Stiglitz for not wanting to “go into technical detail.” It would be quite technical, and not just a detail.
He seemingly doesn’t realize that his “flexible euro” is a return to individual, national Monetary Sovereignty, with each nation controlling its own currency — just the way it always had been before the ill-fated euro experiment.
The dream of the euro — financial merger without political merger — has been an easily predictable nightmare. There simply cannot be successful financial merger without political merger.
The founders of the United States of America were wise enough to realize that.
The individual states (actually small nations, similar to Europe), voluntarily surrendered not only their own currencies, but also agreed on a common government.
And this government pumps billions — trillions — of deficit dollars into the common economy. Most states, being monetarily non-sovereign, run a surplus vs. the federal government, a surplus that is infinitely affordable for the feds.
Only when the anti-deficit ignorant (Hello Tea Party) take control, do we enter a euro-like recession, from which we recover only with massive doses of deficit spending.
The euro can survive as a common currency if the EU drops its austerity foolishness, and begins to pump “deficit” money into the eurozone economy.
And this will happen if the individual nations have a strong voice in their common economy — something akin to a United States of Europe — but without the burden of deficit hawks like the “Committee for a Responsible Federal Budget” et al.
At long last, the eurozone must learn: The belief that Monetarily Sovereign entities should not run deficits, is harmful, inane, and has caused every depression and most recessions in modern history.
Rodger Malcolm Mitchell
Ten Steps to Prosperity:
1. ELIMINATE FICA (Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE (H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich afford better health care than the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE AN ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA, AND/OR EVERY STATE, A PER CAPITA ECONOMIC BONUS (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:
Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012
Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONEFive reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefiting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE CORPORATE TAXES
Corporations themselves exist only as legalities. They don’t pay taxes or pay for anything else. They are dollar-tranferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the government (the later having no use for those dollars).
Any tax on corporations reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all corporate taxes come around and reappear as deductions from your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and corporate taxes would be an good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME. (TROPHIC CASCADE)
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS (Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.