Friday, December 4, 2015

Draghi and the Economic Mess in the Eurozone

You would think that politicians can conjure up economic growth by waving magic wands.  Look at the Eurozone.

Mario Draghi, the head of the European Central Bank (ECB) announced a further drop in the central bank's lending rate from minus -0.3% to -0.4%.  They now pay banks even more to borrow their money.  But, guess what, no takers.

Commercial lending in the Eurozone remains mired below levels achieved in 2008.  Economic growth in the Eurozone is non-existent and several Eurozone economies are imploding (Greece is not the only one).

Why no growth?  Why no commercial lending?

Read Keynes again.  Keynes spoke of "animal spirits" that animate entrepreneurs to embark on starting new businesses and expanding existing businesses.  For the Eurozone, "animal spirits" are a thing of ancient history.  Most of the GDP in a typical Eurozone country is government or government-satellite businesses.  Such businesses only grow by increased taxpayer funding. 

No one working for government has any incentive whatsoever to improve productivity.  Often, as a recent study of US government employees demonstrated, large numbers of government employees don't even have the incentive to show up for work. 

So where is the economic growth going to come from -- lowering ECB lending rates? 

The bankruptcy of modern macroeconomics is that there is an underlying assumption that the rule of law and the regulatory environment don't matter.  In the US and the Eurozone, a large part of government activity is devoted to shutting down private economic activity. In this endeavor, the government has achieved its greatest success. 

Modern US and Europe no longer have economic growth of any substance.  Government bureaucrats have killed off economic growth.  The Climate Change crowd actually proposes substantial negative economic growth as the cure to, what they say, ails the planet. 

So, don't expect the return of normal, say 4 percent, economic growth any time soon.  The great uplifting effect of economic growth is gone.  Those in poverty will remain there. Those at the top of the stagecoach -- Clintons, the Al Gores, the George Soros's, the Michael Moores --will remain atop the stagecoach cavorting around in their sleek jets and limousines, while loudly decrying the evils of the rich (all, except themselves, of course).

These folks don't need economic growth.  They already have their huge share of the pie and they are not about to put their hegemony at risk by permitting economic growth, so that the poor and middle income can prosper.

It is worth noting that, as a matter of history, government economic policy has never, ever produced any economic growth of substance.  Economic growth in the US was its highest in the period from the end of the civil war to the beginning of World War I -- a period in which the US middle class became the economic envy of the world.  There was no government policy at all during this period of dramatic economic growth and no central bank at all.

Only when government decided it knew how to "fine tune" the economy to produce economic growth did American economic growth rates begin to collapse.  We have now learned to accept little or no economic growth without even asking questions.

So, Draghi and Yellen can do whatever they want.  It won't matter.  As Keynes noted, without "animal spirits," there can be no economic growth.

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