Krugman and the real economic problem
Here are some official unemployment rates: Spain 25.1%; Greece 23.1%; Ireland 14.9%; Italy 10.7%; Portugal 15.7%; France 10.3%; UK 8%; Germany 5.5%; US 8.1%; European Union as a whole 11.1%. Actual levels of hardship are of course much higher.
Meanwhile, the International Labor Organization in its 2012 World of Work Report informs us that the global employment rate is just 60.3%. Informal employment is over 40% of nonagricultural employment in two-thirds of the “developing” countries where data is available and even in “successful” countries like Chile, Brazil, and India, it’s at 36%, 47%, and 83%, respectively.
Unemployment, or more specifically, the lack of a secure source of income is one of the top historical problems in the global political economy and it’s not at all unique to our current crisis.
“What is the real economic problem”? Paul Krugman asks this crucial question today in an article written specifically about Spain. I find his answer quite frustrating in that he completely misses what I consider the central dynamic of our world while accepting the idea that pain (albeit not as much as is taking place today) is necessary.
“Basically, Spain is suffering the hangover from a huge housing bubble, which caused both an economic boom and a period of inflation that left Spanish industry uncompetitive with the rest of Europe. When the bubble burst, Spain was left with the difficult problem of regaining competitiveness, a painful process that will take years. Unless Spain leaves the euro — a step nobody wants to take — it is condemned to years of high unemployment. But this arguably inevitable suffering is being greatly magnified by harsh spending cuts” … In other words, the straight economics of the situation suggests that Spain doesn’t need more austerity. It shouldn’t throw a party, and, in fact, it probably has no alternative (short of euro exit) to a protracted period of hard times.”
This widely held Housing Bubble Theory is, IMO, completely inadequate. It overlooks the real and focuses completely on the artificial. In the world of the real, we have extraordinarily high productive capacity; so high, in fact, we simply don’t need that many workers to do the job. We know this to be true as the fundamental political issue almost everywhere is the lack of jobs. The “expert” “solution” for this is little more than an endless competition among workers and nations for the limited jobs that do exist.
High productivity would be a tremendous thing of course if the fruits were widely shared, but not so when they’re tightly controlled by a tiny number of private owners. The result is, by logical necessity, a never ending condition of insecurity and unemployment. This, then, is the “real economic problem”.
Krugman says “Spain is suffering the hangover from a huge housing bubble” but on what rational basis should we expect a “hangover” from simply building too many homes? What should the Spaniards have been doing rather than building homes? If it weren’t for the employment created in the “housing bubble”, wouldn’t there instead have been massive unemployment? The central problem isn’t this bubble or that bubble, it’s that only in a bubble can full employment exist. By not addressing this fundamental truth, Krugman is serving us a highly distorted version of reality. The Krugmanian choice, it seems, is either a bubble world followed by “a protracted period of hard times” or a non-bubble world in which times are always pretty crumby. This despite our extraordinary productivity.
What of Germany? It’s common to see the European problem as being that of a current account crisis. But this view not only hides far more than it reveals, it’s leading us to a dangerously ugly nationalism. One of the central laws of global capitalism is economy of scale and we’d expect therefore large industry to be concentrated in specific geographical locations; and such has happened in Germany.
We can see that the real problem isn’t truly about current accounts if we consider what would likely happen if German manufacturing were divided up in the various peripheral countries. Unemployment would drop in Spain, Ireland, et al but would rise in Germany. Nothing, it would seem, would really change if we consider Europe as a whole as the fundamental reality would remain – there isn’t enough work for everyone. What would Krugman say then? That the unemployed throughout Europe need “a protracted period of hard times”? That they need to get more competitive? This is nonsense. On what possible basis should people be forced into hard times when the “production problem” a la Galbraith has been solved?
Krugman does offer Spain the option of leaving the euro but there’s nothing truly inherent in the euro itself that enforces pain. The real economic problem isn’t remotely one of a Krugmanian Housing Bubble or a current account crisis or a particular currency. It’s that a privately controlled system of massive productivity cannot, by its nature, provide widespread prosperity.