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 A Deep Contrite Apology to the people of Greece

By Shlomo  Maital

Greece

      Greece’s new prime minister Alexis Tsipras has been sworn in and vows to lead an anti-austerity coalition.   He could possibly lead Greece out of the euro and back to the drachma.  This would be unspeakably painful for Greece, in the short run, but possibly best in the long run.

      Meanwhile,  we economists all owe Greece an apology. We have caused immense suffering, needlessly, to 11 million innocent Greeks.  According to Nobel Laureate Paul Krugman, economists drafted the ‘troika’ agreement in May 2010, under which the IMF, European Central Bank and European Commission lent Greece money, in return for extreme austerity.    Greece had no choice in the matter. 

    This document assumed Greece would suffer only a small contraction in 2011 and by 2012 would be recovering.  Yes, unemployment would rise to 15 per cent (Would Merkel’s Germany ever accept such a scenario??) in 2012, but then it would fall rapidly.  Why?  Because austerity would work quickly, heal Greece’s economy, and restore growth.

    Really?  Did the troika economists ever find a single (just one! One!) example in history where austerity worked? 

    No. There are none.

    Instead, Greece suffered a depression, 28 per cent unemployment,  its young people migrated abroad, learning German for instance, and youth unemployment reached nearly 60 per cent. 

     Greece kept its part of the bargain, slashing public spending by 20 per cent.  But the promised benefits of austerity turned out to be disaster.  That is why Tsipras won the election.  And it is why the euro has dived.  The EU and its economists brought it on themselves. 

      It isn’t complicated at all.  To heal a budget deficit, you need a growing economy, because when the GDP grows, tax revenues grow much faster, 1.5 times faster.  To get a growing economy, you need spending and demand.  If people can’t spend, because they have no jobs and their wages are falling, only the government can take up the slack. But if you slash government budgets, the economy will shrink, not grow, and the debt problem will become even worse.  That is what ‘austerity’ does.   It’s pretty simple.

On behalf of my fellow economists, I would like to apologize to the people of Greece. We screwed up.  And worse of all —  none of those responsible seem willing to admit it. 

 Whatever Happened to the U.S. Middle Class?

By Shlomo  Maital

   middle class

   The middle class is the bulwark, the core, of every nations’ democracy and economy.  It provides the labor, the capital and the stability that nations need.  This is why we should worry, when the middle class is disappearing, as it is in the U.S.  (Middle class is defined as a household with income from $35,000 to $100,000.)      

    A report in today’s Global New York Times by Dionne Searcey and Robert Gebeloff, based on their study,  reveals these facts:   

  1. 53 million middle class households, nearly half of all households, are aging; many are headed by those over 65. Why? Older Americans have the safety net of social security, which is politically safe and linked to the cost of living.   While middle class income has declined (median household income fell 9 per cent since the year 2000),  income of  households headed by elderly adults has risen by 14 per cent.  Problem is, that elderly safety net is going bankrupt.  
  2. In the late 1960s, 60 per cent of middle class households were comprised of two married adults with children.  Today?  It is just 25 per cent. 
  3. In the Great Recession, 2008 – ??,  “we lost a lot of middle-income jobs and we gained a lot of low-paying jobs”, says an expert from the American Enterprise Institute.  That is why the strong job figures lately are misleading.  They are Wal-Mart and McDonalds jobs.
  4. The middle class deludes itself. A NYT survey shows 60 per cent of people who call themselves middle class think that if they work hard they will become rich. But this is an illusion.  Social mobility in the U.S. has greatly declined.  To get rich and richer, you need to be rich already.

   I think the article fails to make a key and obvious point.  America’s political leaders were accomplices in shifting America’s manufacturing to Asia.  This destroyed millions of high-paying jobs (as in auto production).   It was done both by Democratic and Republican Presidents.  Nor is Congress even trying to get those jobs back.   Apparently, you cannot have a strong stable middle class unless your country makes things other than hamburgers.  Is that obvious?  America is now paying the price for its leaders’ blindness. 

     Meanwhile, the U.S. middle class has not disappeared, it has simply migrated; middle class families in China and India are booming, thanks in part to well-paying jobs.  

    In his State of the Union address, President Obama called the middle class the “foundation of the American economy”.  Really?    Then, why have you, Obama, and other leaders allowed the middle class to decline so drastically?  And what are you doing to reverse the trend?    

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
January 2015
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