Unformatted text preview: Social Policy and Politics:
Lessons from Europe
Austerity or Stimulus? Global Financial Crisis
Began in 2007-2008
Considered by most experts to be the worst financial crisis since the Great Depression
Failures of businesses and banks, bailouts by
governments, stock market downturns, huge job
Active phase began in August 2007
The US is out of recession now, but the economy is
still recovering slowly and income growth is
anemic. Global Financial Crisis
Many causes suggested and given different credence by experts:
High risk investments, especially the US housing market
Failure of regulation By government, by the market, etc. Wall Street excesses
Interest rate spreads The difference between what a financial institution
charges for a loan and what they receive for it What is a sub-prime mortgage?
Credit scores are used to predict how likely a particular individual is to repay a loan.
Prime scores: 650 or so to 850. Best risks for
banks. Sub-prime is HIGH RISK Why sub-prime mortgages?
intense competition between mortgage lenders
Numbers of good candidates for mortgages were limited, so they relaxed standards to make more money
—gave out riskier mortgages
Major US investment banks, as well as government
entities like Fannie Mae and Freddie Mac, led the way
In 2004 subprime mortgages peaked at 20% of market
2004-2007 were worst years for subprime mortgages
Pressure to make it easier to buy a home began during
Clinton administration Background to the crisis
Housing crisis spread to other parts of the economy
Government policy emphasized deregulation from 1970s on, resulting in less oversight
Policymakers didn’t immediately see problem because
there was less regulation, particularly of entities like hedge
funds and investment banks
Between 1997 and 2006 price of homes increased 124%
Resulted in many refinancing or taking out second mortgages
By September 2008 housing prices had dropped over 20%
Prices declined, so interest rates went up and homeowners had higher payments, which led to default Background to the crisis
Shadow banking system (hedge funds and investment banks) became more important; financial regulation didn’t
keep pace with this
1982 law signed by Reagan began deregulation process,
contributing to savings-and-loan crises of mid- to late-80s,
and created adjustable-rate mortgages
1999: Clinton signed law reducing separation between
commercial and investment banks
2004: SEC relaxed net capital rule—investment banks
could increase debt they were taking on; led to selfregulation by investment banks
All of this contributed to less oversight by government
agencies over investments being taken by private entities Background to the crisis
US Financial Crisis Inquiry Commission reported findings in January 2011: "the crisis was avoidable and was caused by: widespread failures in financial regulation, including the Federal
Reserve’s failure to stem the tide of toxic mortgages;
dramatic breakdowns in corporate governance including too
many financial firms acting recklessly and taking on too
much risk; an explosive mix of excessive borrowing and risk
by households and Wall Street that put the financial system
on a collision course with crisis; key policy makers ill
prepared for the crisis, lacking a full understanding of the
financial system they oversaw; and systemic breaches in
accountability and ethics at all levels" The Crisis
August 2007: BNP Paribas (French bank) blocked withdrawals from 3 hedge funds
because they had no more liquidity
This soon led to a panic as investors and
savers tried to liquidate assets even in highly
regarded financial institutions
What does this mean?
It’s a Wonderful Life https://
The Crisis 2008-09
IMF estimates large US and European banks lost more than $1 trillion in toxic assets/bad loans from Jan 2007-Sept
US Banks that failed/were acquired/were taken over by the
Bear Stearns – allowed to fail in March 2008.
Lehman Brothers -- allowed to fail in September 2008.
Fannie Mae/Freddie Mac
AIG The Crisis – financial impact
TARP: signed into law 10/3/2008
Bailout of US financial system
Authorized US Secretary of the Treasury to
purchase up to $700 billion in distressed assets
and supply cash to banks both foreign and
Mostly mortgages but also other types
Provided judicial and legislative oversight
$426 billion actually spent
$441 billion recovered by sale of assets The Crisis in the “real” economy
Nearly 1/3 of the US lending mechanism was frozen into June 2009—so fewer people could
put money into the economy even if they
could afford it
Decline in wealth, decline in consumption,
decline in business investment
Between June 2007-November 2008,
Americans lost a average of 25% of their
collective net worth
Housing prices dropped
Consumer confidence fell The Crisis in the “real” economy
Huge job loss=huge unemployment rate increase
Hours worked per week declined to 33 (lowest
Decline in wealth for most Americans The Crisis Labor Force Participation rate The Crisis The Crisis
What were the global effects?
Euro crisis in EU
Decline in economic growth across the world: Germany, Japan, Iceland, Mexico
Developing countries seeing growth saw
slowdowns Government Responses
American Recovery and Reinvestment Act of 2009
Cost: approximately $831 billion through 2019
Tax incentives for individuals and businesses
Healthcare: Medicaid, military hospitals, VHA, research
Education: prevent layoffs/cutbacks, increase Pell Grants, Head
Start, childcare services
Aid to low income workers/unemployed: extended unemployment
benefits, more food stamps, job training, WIC, free lunch, etc.
Transportation: highway construction, bridges, high-speed rail, public
transit, Amtrak, FAA upgrades
Water, sewage, environment, public lands
Energy infrastructure, renewable energy investment/research
Housing, scientific research, many other items Government Responses
Auto industry particularly helped
Tax credits for new car purchases
Semi-nationalization of Chrysler, GM
GM = Government Motors Chrysler sold to Fiat Government Responses
Reaction to the stimulus bill in America?
Many economists said it did not go far enough
to cover the spending gap
Some wanted act to address consumer
spending and unemployment more directly
Some economists felt it was too much
government intervention and plan should focus
on reducing impediments to work, saving,
investment, production, lower tax rates
Many more approved entirely Impact?
CBO estimated in 2014 that ARRA saved or created 1.6 million jobs/year 2009-12.
Other estimates differ Crisis in Europe
European financial crisis caused by several factors:
Same high-risk lending and borrowing practices as US
Massive home building sprees in Spain and Ireland Investments in the US market Financial crisis of 2007-2008 that spread globally
This led to the so-called Great Recession
Greek debt crisis Who remembers what caused this? Crisis in Europe
Timeline of eurozone crisis:
Early 2010: Greek underreporting is exposed
Greek government introduces austerity
April 2010: EMU leaders agree on bailout for Greece, Greek
bonds downgraded to junk bond status
September 2010: EU and IMF approve second bailout
November 2010: Ireland bailout
April 2011: Portugal bailout
2011: problems appear in Italy, Spain; global fears grow
Dec 2011: ECB infuses credit into European banking system
May 2013: interest rate cuts in ECB
January 2015 ECB announces QE program of $60
billion/month Crisis in Europe
What is the current state of the European economy?
Technically eurozone is out of recession (economy is
growing) as of early 2013
However, struggling to gain momentum due to weak
domestic demand, more challenging environment for
Euro continues to appreciate (at a 2-year high against
the dollar in early November)
Economists call for ECB to continue cutting interest
Emerging from crisis but not over yet—there is less
talk of nations like Greece leaving the euro EU and euro area unemployment US dollars/ 1 euro
1:1 Responses to the Crisis
How did different European governments respond to the crisis? Germany Today, Germany has completely bounced back
Revitalized export industries
Record-low unemployment (3.9% March 2017)
Some say it’s because of fiscal responsibility and past austerity
Others say it’s due to adjustments in business
and labor relations which encouraged
employment, plus Germany’s place in the
monetary union that allowed it to boost exports
Others say it’s their hefty stimulus package Germany
50 billion euros, approved Jan 2009—1.6% of GDP
Wage subsidy to keep certain workers employed
Tax cuts child bonus of 100 euros
Increase in certain social benefits
Trade-in program for old cars
Focused on increasing competitiveness
Combined with long-term austerity plan Crisis Countries
Portugal, Ireland, Italy, Greece, Spain
What is austerity?
Policy used by governments to reduce budget
deficits during economic hard times
Caused drastic cuts in social spending
Examples: less vacation time, wage cuts for public servants, pension cuts, healthcare, etc.
Eurozone has required these countries to
reduce the debt: GDP ratio or face
consequences/not receive bailouts Reactions to Austerity Austerity vs. Stimulus?
What is the pro-austerity argument? Why Austerity?
It all goes back to one paper: Reinhart & Rogoff
This paper showed that once government
debt exceeds 90% of GDP, the consequences
for the economy are disastrous
Thus, in a bad economic time, you must cut
Goes contrary to the prevailing wisdom of
John Maynard Keynes
Other evidence has also been provided in
academic papers—decrease in government Why Austerity?
Northern Europe has done well with austerity
Example: Latvia, which acted sooner than other countries and saw an economic recovery
You need to restore confidence in consumers
and investors—stimulus, which increases
debt, is hard-pressed to do this
It’s easier to cut spending than raise revenue
in a crisis
Also, it drives reforms by forcing cuts
Piling on more debt now limits growth later Austerity vs. Stimulus?
Following anti-austerity slides from lecture by Mark Blyth from a guest lecture in 2014 Mark Blyth on Austerity
qA So why did Anyone ever think
that Austerity was a good idea? The “can’t live with it, can’t live without it, don’t want to pay for
it” problem of the state John Locke’s fifth chapter Markets as inequality generators
Don’t trust the state
since it will rob you
But you need it to
create the markets
you want “The Practice of Funding has gradually enfeebled every state that
has adopted it” Adam Smith Parsimony, Savings, Investment and
Inequality and the
Necessity of the
Taxation to the
Result: Debt perverts parsimony The Result: The “can’t live with/without
it and don’t want to pay for it” problem
Liberalism’s Neuralgia and the Aspirin of
Austerity Keynes (and events) Overturn Austerity
Fallacies of composition and non-scalability in labor and money markets
Investment expectations as a social multi-person
“Consumption, repeat the obvious, is the sole end
of economic activity”
Democracy is asset insurance for the Rich
Redistribution and Debt is reinsurance for Democracy Other notes on austerity
Reinhart and Rogoff paper discredited in 2013 over minor error in calculations which
invalidated the entire conclusion
Does this invalidate austerity? What have we learned from Europe?
A concluding chapter to the course America is #1 in some things
Military power (we spend more than next 20 countries combined)
Economic power (largest economy of any
single country and nearly largest GDP per
Cultural influence (Hollywood, English
language –though not ours originally!)
Innovation Patents Silicone Valley / internet Nobel Prizes Medical advances / pharmaceuticals Universities But America is not #1 in terms of other things
Social insurance (unemployment/ disability)
Infant Mortality / life expectancy
Best Universities in the world, but…
High Drop out rates
Mediocre on Comparative Tests (PISA test)
Ridiculously expensive university tuition Environmental Protection We’ve got some problems
Huge government debt
50 million lack health insurance & health takes up 17% of economy
Many failing schools / weak in international
High poverty rates In NJ, “1 in 3 children in 2010 lived in a home that could not meet their basic needs without assistance” &
368,173 children on food stamps. (
) High violent crime and incarceration rates
Can we learn lessons from others? Possibly from Europe? And we don’t trust the government to fix them Trust in
the US, Pew
Research And Americans may have a bad opinion of
our politicians… …but Europeans distrust and
dislike their politicians too! And they distrust national parliaments Why look abroad?
It is always right for one who dwells in a well-ordered state to go forth on a voyage
of enquiry by land and sea so as to
confirm thereby such of his native laws as
are rightly enacted and to amend any that
are deficient. Plato, Laws The greatness of the Americans does not simply consist in their being more
enlightened than other nations, but in
their being able to repair their faults.
Alexis de Tocqueville, Democracy in
America Those who only know one country, know no country. Seymour Martin Lipset Where to look for lessons?
OECD countries Why Study Europe?
To understand Europe for its own sake… Biggest economic bloc in the world
Largest group of democracies
Our strongest allies To understand American politics and
policy better by learning from other
democracies… How do other democracies work?
How have European countries dealt with
challenges similar to those we face? Health Care
etc… To counter misconceptions / myths about Europe in
American public debates
Excerpt from Hill, Europe’s Promise, p.30 Are we over-taxed? 2011 Are we over-taxed?
Taxes in US have fallen dramatically over past 30 years 1978 top fed tax rates: 70% individuals, 48% corporate; 40% capital gains
2011: 35% individuals, 35% corporate and 15%
capital gains Is it any wonder the federal budget deficit is skyrocketing?
Taxes that are too high (coupled with poor
gov’t services) can stunt growth, but some
of the most prosperous governments in the
world have some of the highest taxes (e.g.
Denmark, Sweden, Belgium, Netherlands
and Norway) Taxes
Tea Party VS. Occupy Wall
gewanted=all For Two Economists, the Buffett Rule Is
Just a Start
by Annie Lowery “The United States is getting accustomed to a completely crazy level of inequality,” Mr. Piketty said, with a degree of
wonder. “People say that reducing inequality is radical. I
think that tolerating the level of inequality the United States
tolerates is radical.” “In a way, the United States is becoming like Old Europe,
which is very strange in historical perspective,” Mr. Piketty
said. “The United States used to be very egalitarian, not just
in spirit but in actuality. Inequality of wealth and income
used to be much larger in France. And very high taxes on
the very rich — that was invented in the United
nted=all Europeans pay more taxes, but some of them get more
US households pay ~ 31% of health costs out of pocket ($2,306/year)
Americans spend 3x as much private money as
Europeans for old age care.
In Europe, you don’t need to save for your child’s
college tuition. Universities are publicly funded
(i.e. by tax revenues)
‘Overtaxed’ French and Germans have far higher
savings rate than Americans (12-14 % vs. 0% in
America prior to recession) & Americans have far
higher credit card debt, college debt and borrow
against houses. So are they being taxed to death?
Or spending too much? What can we learn from Europe
You get what you pay for… • …and you need to pay for what you get, or you
end up in huge DEBT!
• IS US acting more like Greece or Netherlands? Regulation: Too hot, too cold and just right? Regulation: Too hot
“It was [in 2011] that Greek wannabe businessman Fotis I.
Antonopoulos, a successful Web program designer here, decided
he wanted to open an e-business selling olive products.
Luckily, he already had a day job.
It took him 10 months — crisscrossing the city to collect dozens of
forms and stamps of approval, including proof that he was up to
date on his pension contributions — before he could get started.
But even that was not enough. In perhaps the strangest twist of
all, his board members were required by the Health Department
to submit lung X-rays — and stool samples — since this was a
nted=all Too Cold World Bank – Worldwide Governance
Indicators What can we learn from Europe?
There is no such thing as a completely ‘free market’
All actual markets exist within a legal
framework that is ultimately backed by
Regulation can strangle markets (like in
Greece), but lack of regulation can lead to
catastrophe (like on Wall Street).
When people say they want a market
deregulated, ask yourself ‘cui bono’? (in
whose interest?) What can we learn from Europe?
Government is not “the problem”
Bad government or too much government is a
But absence of government is a problem too
In many economically successful European
countries, government spending as a % of GDP is
far higher than in the US and taxes are far higher
In the US, absence/weakness of government has
contributed to major crises What can we learn from Europe?
Viewing Europe’s problems may highlight our strengths (or warn us of problems that we
may face in the future)
Our advantage in integrating immigrants
Our more youthful population What can we learn from Europe?
US will never be Sweden!
Many things that work in Europe can’t simply be imported to the US
A slight increase in taxes on wealthy or in
regulation of financial markets does not equal
a ‘slide into socialism’ What can we learn from Europe?
Never believe your own propaganda.
Studying European experiences forces us to
question our own assumptions
Maybe we are the ‘greatest country on earth’
but we should be able to demonstrate that
through clear-headed analysis, we shouldn’t
just assert it. What I hope you’ve learned…
If you forget everything else, remember to compare. When facing a public policy
challenge, ask: How do other countries deal with that?
Which countries are most successful? Which countries are the biggest failures? Why?
What, if anything, can we learn from their
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- Fall '16
- Democracy in America