South By North Strategies, Ltd.

How Austerity Is Killing Europe

Writing in The New York Review of books, Jeff Madrick argues that “austerity is killing Europe.”

Proponents of austerity claim that as nations take control of their finances businesses become more convinced that interest rates will not rise and that growth will resume. Their reasoning has been abetted by the financial markets, which drove up rates on Greek debt and soon enough on the debt of nations like Portugal, Spain and Italy. Should these nations not be able to pay their debts, bond buyers wanted a high enough interest rate to compensate for the risk.
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But this is pre-Great Depression economics. How could the EU so misread history and treat with contempt the teachings of John Maynard Keynes, who argued that during recessions governments must expand economies through spending and tax cuts, not the opposite? In practice, making large-scale budget cuts or raising taxes, as Keynes showed, will reduce demand for goods and services just when an increase is needed. Faltering sales will undermine the confidence of businesses far more than fiscal consolidation will embolden them. By ignoring this, European policy makers will deepen, not solve, the financial crisis and millions of people will suffer needlessly.
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Indeed, austerity economics has not worked in one single case in Europe in the last two years.

An Appalling Policy Idea

Robert Greenstein of the Center for budget and Policy Priorities finds proposed changes to the unemployment insurance system “an appalling idea, even by Washington standards.”

The proposal will primarily affect workers who were paid low or modest wages (since people with less education tend to be paid less) and who consequently are unlikely to have much in the way of assets to help them weather their period of unemployment.
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Moreover, the people affected will, in many cases, have paid significant UI taxes over the years.  UI taxes are generally levied on the first $7,000 of a worker’s wages (this figure is somewhat higher in some states).  Although employers pay the tax, economists agree that employees largely bear the burden of the tax in the form of lower wages than they would otherwise receive.  And since the tax is levied on only the first $7,000 (or a similar figure) in annual wages, it constitutes a larger share of the wages of lower-wage workers than of higher-wage ones.
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To add insult to injury, the proposal would allow people without a high school diploma or GED to receive benefits only if they enroll in classes for which there often would be no slots available — in part because of budget cuts approved by some of the same policymakers who now embrace this new requirement.

Around The Dial – January 9, 2012

Economic policy reports, blog postings, and media stories of interest:

• Paul Krugman scratches his head over political logic.
• TaxVox analyzes Mitt Romney’s tax plan.
• The NY Times reports on workforce training in North Carolina.
• Jared Bernstein wonks out over seasonal adjustment factors.
• Dean Bakers asks if Europe really isn’t able to compete.

Reforming Economic Development Incentives

A new report from the NC Budget and Tax Center outlines five strategies for improving the accountability and effectiveness of the state’s economic development incentive programs. From the report …

Incentive deals offered by county and municipal governments are the most common form of economic development subsidies in North Carolina, yet current law does not require those deals to include performance criteria, monitoring provisions, or clawbacks unless the incentive is matched by state JDIG or OneNC incentive funds. Although many local governments require some level of performance criteria in their incentive deals, many do not, leading to a situation where companies can take local incentive funds without any real legal obligation to create the jobs they promised. State lawmakers can close this loophole by extending current state‐level performance criteria to all incentive deals at the local level.
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These criteria can also extend to any other incentives granted by the General Assembly above and beyond those provided in the JDIG and OneNC Programs. Except in the very rare cases of large‐scale “transformative” industrial development efforts, the state should avoid granting “special” incentives above and beyond those provided through OneNC and JDIG, as “special” deals tend to cost significantly more in terms of incentive dollars and are often given without adequate accountability and performance criteria attached. Moreover, the statutory programs already provide sufficient incentives for most projects, so special incentives are largely unnecessary….

New Year, More Economic Insecurity?

The American Public Media radio program Marketplace reports on the rise of economic insecurity in the United States.