The article goes off the rails pretty early: What matters for a nation is its GDP. That's a country's equivalent of personal income.
GDP is not income, it's a sum of flows. The classic illustrative example is a man marrying his maid:
Unmarried: Man earns $200k/year, pays his maid $25k/year. GDP = $225k.
Married: Man earns $200k/year, pays his wife $0. GDP = $200k.
In both cases, the ability of this pair of humans to service debt and purchase goods and services remains the same. Both couples are equally wealthy, you've just tweaked an accounting identity.
One of the things I'm beginning to suspect is that the metrics are rigged. That is, most economic discussions are based on terms that aren't meaningful in any practical way. I see a lot of economists poking at the metrics with their pencils and talking theory while waving their arms around wildly.
But I am simply an observer. I love watching smart people argue about stuff, so economics fascinates me. One thing is for sure, there is a ton of diverging opinions about the Euro and the sovereign debt crisis.
There are definitely problems with GDP, but you didn't just identify one of them. To keep things simple (at first) assume that in your example, all of the man's income otherwise goes under a mattress, doing nothing to improve the economy. The case of the man giving a job to maid is definitely worth more to the economy than the man who sticks it all under the mattress.
In the real world, the money doesn't go under a mattress, of course. It gets spent, invested, etc. Your example doesn't represent reality at all, because both men, whether giving money to the maid or not, add way more than $200k to the economy, because by buying goods and services they are basically giving fractions of jobs to workers all across the economy.
GDP tries to measure the economic activity of a nation. Saying it's a bad measure of individual wealth, while true, is completely beside the point. It was never meant to measure that. Someone who puts themselves into debt building a business will have a negative net wealth for quite a while. Doesn't mean they aren't adding value to the economy.
That doesn't really debunk the main thrust of the article, though. Yes, GDP isn't really like personal income, but less GDP growth is generally bad. And in this case, there are plenty of other economic metrics showing how bad the situation is, such as unemployment which was mentioned in the article.
I don't think that proves what you think it proves. You're missing what he would do with that $25k if he marries his maid. Maybe he would spend it on something else. Maybe he saves it and the bank loans it to someone else. In either case, it does matter what happens, because it gives us a clue into the velocity of money.
GDP measures the value of all the stuff and services we produce. Which shows how much income we earned. So, you're wrong.
The specific analogy isn't particularly apt, but the general point of the article stands. When you have crushing unemployment and an income crisis, the solution is not to make further deep cuts in the misguided pursuit of austerity. You should be promoting growth, first and foremost.
I know HN has a libertarian, small-government bent, but there's a reason public spending is included in GDP: it's expansionary. The government pays people to do things, then those people buy things. This spurs growth. As with many things, it's a spectrum and going too far in either direction (austerity v. public ownership of economy) is a bad thing.
What is clear is that, when you have a quarter of your country out of work and fully half your future workforce untrained and non-contributing, you don't further reduce the consumptive power of your population. Unpopular an idea though it may be in these parts, Keynesian economics works in regards to recovering from recessions and depressions; disciples of the Austrian School have yet to show any ability to do so and their policies look set to spell the end of the Euro.
The private sector is fundamentally better and healthier in the long run for a nation's economy than its public counterpart, but when the private sector is depressed and getting worse through negative feedback loops, the public sector has to step in. It's the growth driver of last resort.
True but not that important in this case. These factors tend to make it hard to compare GDP across countries or across time frames large enough for societies to change, but if a countries GDP suddenly falls by 5% it isn't because a bunch of people got married. In the long run GDP correlates with wealth, and in the short term it correlates quite well. And since it's easy to measure, we can legitimately use it in the way that the article uses it.
I render a service to yummyfajitas for $10M; say, sending a text message "you rock!"
yummyfajitas renders similar service to me for $10M; say, sending a text message "you sock!" back.
GDP = $20M+$0.20 (cost of text messages). Net change to economy: 0
You can (and indeed, countries do) inflate GDP for various reasons, such as GDP/debt requirements.
True but in a country of 300 million people the measure is meaningful. There are not[1] a lot of such examples. It's not merely tweaking an accounting identity. It can be but in the aggregate, with a sufficiently large number of people, it isn't.
So per my simple understanding of GDP, the GDP will remain the same. The next flaw in your example, is that if this person is in $25K/year deficit, marrying the maid will solve his problem.
Are you sure of this example? It does look like GDP is 200k in both cases. The first case looks wrong, if he pulls 25k from his savings, there will be -25k in savings (or investments as they are the same) and +25k in spendings. Effect is 0...
There is a fair bit of people who considers the euro to have been planned to cause a crisis to driver deeper integration in the Euro zone.
Spain is grim BUT it's important to understand how big the black economy is here. A lot of the unemployment numbers are colored by people actually working on the side while putting the dole in their pockets.
Also GDP debt is not that bad and the government seems able to actually push through reforms in comparison to Italy or Greece.
I would prefer to see the percentage of people on the "ajuda" that is the only thing available after you loose the unemployment benefits.
Living here there is one massive obvious issue. The property prices have not dropped as massively as in the states. My theory is that the banks are not selling property as they don't have to mark to market. If they had to write the market value of all that property I figure the whole Spanish banking system would be bankrupt.
The article's title tells me that the author doesn't understand what's going on. "Why austerity is destroying Europe." How about the reality of the situation -- overspending and borrowing have destroyed europe.
Iceland seems to have fixed the problem the correct way: default.
Greece just did the equivalent of a credit card balance transfer while converting the loan to a secured transaction. In the name of "saving" the banks of Europe, Greece has been financially raped. Spain is next.
Oh, and Japan and the United States aren't too far behind.
Iceland seems to have fixed the problem the correct way: default.
This is the part that dumbfounds me, Iceland ignored the common wisdom when they common wisdom said that very bad things would happen to them if they did not listen to the "smart" people. They went ahead and did it, and none of the bad things happened, further things got a lot better. But somehow we allow everyone to convince us to ignore the blatant evidence that Iceland presented that those saying don't default are pretty much lying through their teeth, because they have a conflict of interests.
I think US would rather devalue the dollar by 30% in a very short amount of time than get in trouble over its debt. That would still be a catastrophic outcome, but I'm just saying that's most likely the option they will take.
Japan is one of the major lenders of current secure debt in Europe. Japan would only have to default if the primary borrowers defaulted, which is possible.
It is hard to read the Europe crisis without taking into account that is a model that, while flawed, traditionally tried (hard) to provide decent conditions for the poorest segments of the population. This huge national expenses (and taxation levels) of most EU countries are sometimes just stupid wastes, but also the result of a set of services that we know take for granted but are not granted in many places outside Europe.
If our model will fail there will be to reconsider a lot of things, but if it will survive this crisis it will show that it is possible to create developed nations where a decent level of public health care, school, and services are possible in the long run.
There's nothing wrong with the European welfare state model, just look at Scandinavia. The problem is with sharing a currency with countries that you have large trade deficits with; so not the European model, but the Euro model.
The European crisis has nothing to do with the inflated public spending. That's just the spin that American and especially conservative media have pursued for obvious reasons. Greece does less public spending than Germany, for example (check the OECD data).
Things that actually caused the crisis: a flawed shared currency system that lacks risk sharing mechanisms, an unregulated government bond market riddled with moral hazard, state corruption.
The problem with spanish economy comes from the HUGE construction bubble it had a few years ago. Spain alone was building more than France, Germany and Italy TOGETHER. Government made money, construction enterprises made money, real state companies made lots of money, employment was high, even some citizens speculated buying and selling houses at a higher price some years later. To support that accelerated growth and construction, spanish banks borrowed money (LOTS OF IT) from european banks, mainly german banks. Banks went crazy giving mortgages, just as in the US. Mortgages went up to 25-30 years and beyond. When the bubble burst, prices went down, mortgage interest rates went up, and many people lost their jobs. That led to many people unable to pay for its mortgage, and banks started acumulating real state. Nowadays, banks hold a HUGE real state stock, and they don't want to sell it at current prices, because they would have to admit that their assets aren't worth what they claim. Because of that strategy of the banks, prices haven't go down as much as in other countries which suffered a bubble burst too. There is a very big stock of inmovilized real state in Spain.
And add to it that Spain issues bonds but doesn't easily find buyers now. ECB (European Central Bank) has given spanish banks thousands of millions of euros at an 1% interest rates, and those spanish banks, instead of giving loans and credit to enterprises and people, they buy spanish bonds (at 5%-6% levels).
I'm not an Euro Zone resident, so I have to ask: what's stopping the people of Spain (especially the youth, with their 50% unemployment) from hopping over to Germany and finding work there? Isn't it the case that any member of an Euro country can work in any other country?
Germany has a better educated workforce, a much larger amount of flat land that is connected by waterways, and a central location to other high income nations. They are more competitive. For Spain to be competitive, they need to be able to price their goods lower. This means that their money won't be able to buy as many things from abroad, but they will be able to export things and conduct business amongst themselves. The simple fact is the fiscal policies in Europe are united and the political policies differ. The Euro was supposed to help unify the continent and avoid another war but instead has put the southern countries into debt.
What happens when you keep spending more than you have? Your economy contracts. Can you inflate it with easy currency? Sure thing -- up unto a point.
This Keynesian conversation is going to be very interesting to watch over the next few years. Lots of countries trying different things. I imagine no matter how it turns out, there will be quite a bit of spin, though. But still, it's better to have examples than just listen to theory, even if the examples are murky.
From what I hear, more QE is coming from the ECB. That might have a generally good effect on many economies. Or it might just be fun to blow through for a few months. We'll see.
I don't think Keynesians advocate "spending more than you have" forever. The thrust, as a I understand it, of their arguments is that deficit spending can be useful in getting out of a downturn and can have beneficial aspects. Of course, if done improperly, it can have bad effects.
The problem here is not spending more than we have, but spending it in the wrong things. And now cutting the wrong things. Banks are using the money to keep their balances healthy, not to lend money to productive business.
"Europe's policymakers have blundered in the control of a delicate machine, the workings of which they do not understand. They're not evil. But they're almost certainly wrong."
How does this columnist then believe that he understands the economy if policymakers are so clueless? If Spain's economic problems were so easy to fix that everybody could just read this article and solve them, they probably wouldn't exist in the first place.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
-F.A. Hayek
The author isn't claiming they know how to manage it better. He's just suggesting that their management, or philosophy of management isn't correct. (But maybe I'm giving the author too much credit!)
All it boils down to is Monetarist vs Keynesian. I'm not too sure Keynesian is good in the long run. points to US's rapidly escalating debt. Oh that's right, according to Keynes: "In the long run we are all dead".
... and explain why again this is a problem? Unfortunately, the majority of commentators just take "high debt = bad" as a given, because they confuse their own situation (private household, currency user) with that of the US government (currency issuer).
The US situation basically boils down to: the rest of the world has been crazy for US$ for some time and is therefore willing to send real goods to the US in exchange for numbers in a computer system. This is certainly going to change in the long run. That will drive down US imports and make imported goods more expensive for US residents, but that's only fair. It won't lead to collapse. In fact, if it is semi-intelligently managed, it could lead to a rebirth of US industry.
People tend to forget that Keynesianism is about counter-cyclic measures. That includes not wasting trillions when the economy goes well -- not what was done in the '00s exactly...
Despite many of the very clear comments in this thread pointing out holes in the article, the overall conclusion is unfortunately fairly sound - for the mid term.
The current austerity measures combined with unemployment mean the markets at large do not expect Spain to remain stable enough to invest in. With extremely high unemployment, especially among youth, comes social instability. This kind of instability frightens governments, which typically point to the private sector as the source of all ills and nationalize swaths of industry in order to feed populist sentiment.
This fear is being reflected now, and I tend to agree that I don't expect the mid-term to be kind to Spain. However, in the longer term it may come out better off, provided Germany continues to hold the Eurozone with an iron-wallet.
Germany does (mostly) control the EU by proxy anyway (~ '-')~
Spain's minimum wage is up 50% from 8 years ago. Demand for labor has collapsed.
There's a thing called the law of supply and demand. Price fluctuates to keep both roughly equal.
But when you hold the price artificially high, you get more supply than demand, especially when supply is not easily changed, as is the case with labor.
There is no mystery here. Just people adopting policies whose effects they do not or will not understand.
I live in the Tenerife. Canary Islands are, supposedly, one the top 3 regions with the most consumer debt.
Unemployment here is also higher than in the mainland since there's not much of an economy. There was construction but that bubble burst. There's tourism... and nothing else.
The interesting bit is that you don't really see the effects of the economic crisis, not directly. Most everyone drives nice cars, the parking lot at the mall is full, etc.
You do see indirect effects, though. There are more security guards at the mall and the supermarket within. One of the cafes installed two video cameras. The pharmacy posted a note that stating that no refunds will be offered on medicine or unused prescriptions.
Oh yes, the property prices here are behind the mainland adjustment-wise. Must be due to our awesome weather.
One of the great things about terrible situations is that everyone agrees on how bad it is. This agreement makes them think they have something in common. But if you prompt them to independently suggest solutions, you usually find that they hardly agree at all. That's happening here with the Euro. The situation is potentially unfixably bad, which gives the advantage that nothing will work and no one will ever have to find out they didn't agree all along.
Is it me or do Euro austerity measures seem to drive a certain segment of economic commentators nuts? The number of articles I've seen raging about "evil" Germany forcing Greece / Italy / Spain to the brink of destruction with austerity measures. It's like they're afraid of something. What if austerity measures work? Is that going to burst someone's bubble?
So, generally speaking, this should make moving to Spain and working remotely from there pretty attractive, shouldn't it? Can anyone from Spain comment on how the life is like there at the moment (assuming the 100K USD income level)?
I'm spanish and I couldn't agree more.
Many scientist and engineers are leaving the country looking for better work conditions.
Also It's really difficult to run a business here.
No future...
When did writers at major publications like The Atlantic start submitting their own articles to HN? It's one thing when a programmer or other startup / tech blogger submits their own work, but when a magazine does, it just feels like spamming.</rant>
[+] [-] yummyfajitas|14 years ago|reply
GDP is not income, it's a sum of flows. The classic illustrative example is a man marrying his maid:
Unmarried: Man earns $200k/year, pays his maid $25k/year. GDP = $225k.
Married: Man earns $200k/year, pays his wife $0. GDP = $200k.
In both cases, the ability of this pair of humans to service debt and purchase goods and services remains the same. Both couples are equally wealthy, you've just tweaked an accounting identity.
[+] [-] DanielBMarkham|14 years ago|reply
But I am simply an observer. I love watching smart people argue about stuff, so economics fascinates me. One thing is for sure, there is a ton of diverging opinions about the Euro and the sovereign debt crisis.
[+] [-] rauljara|14 years ago|reply
In the real world, the money doesn't go under a mattress, of course. It gets spent, invested, etc. Your example doesn't represent reality at all, because both men, whether giving money to the maid or not, add way more than $200k to the economy, because by buying goods and services they are basically giving fractions of jobs to workers all across the economy.
GDP tries to measure the economic activity of a nation. Saying it's a bad measure of individual wealth, while true, is completely beside the point. It was never meant to measure that. Someone who puts themselves into debt building a business will have a negative net wealth for quite a while. Doesn't mean they aren't adding value to the economy.
[+] [-] streptomycin|14 years ago|reply
[+] [-] mattobrien|14 years ago|reply
GDP measures the value of all the stuff and services we produce. Which shows how much income we earned. So, you're wrong.
[+] [-] redthrowaway|14 years ago|reply
I know HN has a libertarian, small-government bent, but there's a reason public spending is included in GDP: it's expansionary. The government pays people to do things, then those people buy things. This spurs growth. As with many things, it's a spectrum and going too far in either direction (austerity v. public ownership of economy) is a bad thing.
What is clear is that, when you have a quarter of your country out of work and fully half your future workforce untrained and non-contributing, you don't further reduce the consumptive power of your population. Unpopular an idea though it may be in these parts, Keynesian economics works in regards to recovering from recessions and depressions; disciples of the Austrian School have yet to show any ability to do so and their policies look set to spell the end of the Euro.
The private sector is fundamentally better and healthier in the long run for a nation's economy than its public counterpart, but when the private sector is depressed and getting worse through negative feedback loops, the public sector has to step in. It's the growth driver of last resort.
[+] [-] jpdoctor|14 years ago|reply
At a 10% income tax rate: First case is $22.5K/yr, second case is $20K/yr.
So yes: GDP is the same as income for the gov't for practical purposes.
[+] [-] Symmetry|14 years ago|reply
[+] [-] beagle3|14 years ago|reply
I render a service to yummyfajitas for $10M; say, sending a text message "you rock!" yummyfajitas renders similar service to me for $10M; say, sending a text message "you sock!" back.
GDP = $20M+$0.20 (cost of text messages). Net change to economy: 0
You can (and indeed, countries do) inflate GDP for various reasons, such as GDP/debt requirements.
[+] [-] yequalsx|14 years ago|reply
[1] Added the important word "not".
[+] [-] zmj|14 years ago|reply
[+] [-] Retric|14 years ago|reply
In countries where tax evasion is high enough, the standard of living can be fairly high while the government is failing see Italy and Greece.
[+] [-] csomar|14 years ago|reply
[+] [-] loverobots|14 years ago|reply
[+] [-] viandante|14 years ago|reply
[+] [-] christkv|14 years ago|reply
Spain is grim BUT it's important to understand how big the black economy is here. A lot of the unemployment numbers are colored by people actually working on the side while putting the dole in their pockets.
Also GDP debt is not that bad and the government seems able to actually push through reforms in comparison to Italy or Greece.
I would prefer to see the percentage of people on the "ajuda" that is the only thing available after you loose the unemployment benefits.
Living here there is one massive obvious issue. The property prices have not dropped as massively as in the states. My theory is that the banks are not selling property as they don't have to mark to market. If they had to write the market value of all that property I figure the whole Spanish banking system would be bankrupt.
[+] [-] jstalin|14 years ago|reply
Iceland seems to have fixed the problem the correct way: default.
Greece just did the equivalent of a credit card balance transfer while converting the loan to a secured transaction. In the name of "saving" the banks of Europe, Greece has been financially raped. Spain is next.
Oh, and Japan and the United States aren't too far behind.
[+] [-] kls|14 years ago|reply
This is the part that dumbfounds me, Iceland ignored the common wisdom when they common wisdom said that very bad things would happen to them if they did not listen to the "smart" people. They went ahead and did it, and none of the bad things happened, further things got a lot better. But somehow we allow everyone to convince us to ignore the blatant evidence that Iceland presented that those saying don't default are pretty much lying through their teeth, because they have a conflict of interests.
[+] [-] jellicle|14 years ago|reply
How about the reality of the situation: Spain was a paragon of fiscal virtue prior to the crisis:
http://krugman.blogs.nytimes.com/2012/04/15/insane-in-spain/
Spain had low debt and a large budget surplus.
[+] [-] nextparadigms|14 years ago|reply
[+] [-] unreal37|14 years ago|reply
[+] [-] pessimizer|14 years ago|reply
http://www.cepr.net/index.php/blogs/beat-the-press/spain-did...
[+] [-] frankydp|14 years ago|reply
[+] [-] antirez|14 years ago|reply
If our model will fail there will be to reconsider a lot of things, but if it will survive this crisis it will show that it is possible to create developed nations where a decent level of public health care, school, and services are possible in the long run.
[+] [-] pessimizer|14 years ago|reply
Spain did not run up high public debt.
http://www.cepr.net/index.php/blogs/beat-the-press/spain-did...
http://www.cepr.net/index.php/blogs/beat-the-press/spains-qd...
[+] [-] icandoitbetter|14 years ago|reply
Things that actually caused the crisis: a flawed shared currency system that lacks risk sharing mechanisms, an unregulated government bond market riddled with moral hazard, state corruption.
[+] [-] StavrosK|14 years ago|reply
"So if you're poor and you get sick you just... die?" "Pretty much."
[+] [-] drKarl|14 years ago|reply
[+] [-] drKarl|14 years ago|reply
[+] [-] ajays|14 years ago|reply
[+] [-] draggnar|14 years ago|reply
[+] [-] DanielBMarkham|14 years ago|reply
This Keynesian conversation is going to be very interesting to watch over the next few years. Lots of countries trying different things. I imagine no matter how it turns out, there will be quite a bit of spin, though. But still, it's better to have examples than just listen to theory, even if the examples are murky.
From what I hear, more QE is coming from the ECB. That might have a generally good effect on many economies. Or it might just be fun to blow through for a few months. We'll see.
[+] [-] yequalsx|14 years ago|reply
[+] [-] nextparadigms|14 years ago|reply
http://www.businessinsider.com/7-gasoline-thanks-ben-2012-4
[+] [-] narag|14 years ago|reply
[+] [-] cmcewen|14 years ago|reply
How does this columnist then believe that he understands the economy if policymakers are so clueless? If Spain's economic problems were so easy to fix that everybody could just read this article and solve them, they probably wouldn't exist in the first place.
[+] [-] skylan_q|14 years ago|reply
-F.A. Hayek
The author isn't claiming they know how to manage it better. He's just suggesting that their management, or philosophy of management isn't correct. (But maybe I'm giving the author too much credit!)
[+] [-] meric|14 years ago|reply
[+] [-] nhaehnle|14 years ago|reply
... and explain why again this is a problem? Unfortunately, the majority of commentators just take "high debt = bad" as a given, because they confuse their own situation (private household, currency user) with that of the US government (currency issuer).
The US situation basically boils down to: the rest of the world has been crazy for US$ for some time and is therefore willing to send real goods to the US in exchange for numbers in a computer system. This is certainly going to change in the long run. That will drive down US imports and make imported goods more expensive for US residents, but that's only fair. It won't lead to collapse. In fact, if it is semi-intelligently managed, it could lead to a rebirth of US industry.
[+] [-] wyan|14 years ago|reply
[+] [-] kposehn|14 years ago|reply
The current austerity measures combined with unemployment mean the markets at large do not expect Spain to remain stable enough to invest in. With extremely high unemployment, especially among youth, comes social instability. This kind of instability frightens governments, which typically point to the private sector as the source of all ills and nationalize swaths of industry in order to feed populist sentiment.
This fear is being reflected now, and I tend to agree that I don't expect the mid-term to be kind to Spain. However, in the longer term it may come out better off, provided Germany continues to hold the Eurozone with an iron-wallet.
Germany does (mostly) control the EU by proxy anyway (~ '-')~
[+] [-] stretchwithme|14 years ago|reply
There's a thing called the law of supply and demand. Price fluctuates to keep both roughly equal.
But when you hold the price artificially high, you get more supply than demand, especially when supply is not easily changed, as is the case with labor.
There is no mystery here. Just people adopting policies whose effects they do not or will not understand.
http://www.google.com/publicdata/explore?ds=ml9s8a132hlg_...
[+] [-] joelreymont|14 years ago|reply
Unemployment here is also higher than in the mainland since there's not much of an economy. There was construction but that bubble burst. There's tourism... and nothing else.
The interesting bit is that you don't really see the effects of the economic crisis, not directly. Most everyone drives nice cars, the parking lot at the mall is full, etc.
You do see indirect effects, though. There are more security guards at the mall and the supermarket within. One of the cafes installed two video cameras. The pharmacy posted a note that stating that no refunds will be offered on medicine or unused prescriptions.
Oh yes, the property prices here are behind the mainland adjustment-wise. Must be due to our awesome weather.
[+] [-] Facens|14 years ago|reply
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] sopooneo|14 years ago|reply
[+] [-] harryf|14 years ago|reply
[+] [-] huhtenberg|14 years ago|reply
So, generally speaking, this should make moving to Spain and working remotely from there pretty attractive, shouldn't it? Can anyone from Spain comment on how the life is like there at the moment (assuming the 100K USD income level)?
[+] [-] fasouto|14 years ago|reply
[+] [-] nhebb|14 years ago|reply