The early 1980s recession, a non-apologetic summary

I'm working on another post when I started looking at the 1980s recession. My primary reading is Wikipedia which is pulling from the CBO (since I don't want to spend hours doing this project).

The recession began in January 1980 by GDP growth which was quickly reversed by an expansionary economic policy by President Carter and the Federal Reserve which moved the economy back to above-average economic growth. When President Reagan got into office the unemployment rate had stabilized and the economy was growing until August 1981 when the Reagan administration arrived and the interest rate jumped to record highs. The economy entered recession until late 1982 with this policy unemployment hit its highest post-World War II levels peaking at 10.8% (0.8% higher than October 2009, the peak of the last recession). The short way to put this is they did exactly what Keynes would say not to do and the response was exactly what Keynes said would happen. They then reduced the interest rates and raised taxes in 1982 during the worst point of the recession. and the unemployment rate collapsed and growth was restored, exactly as Keynes predicted.

Shame on the Keynesians who didn't point this out and boast in the early 1980s, but if we are to blame anyone we need to blame the Democrats for not making this failure of policy which really disproved laissez faire and proved the efficacy of Keynesianism in the most effective way (trying both solutions and finding normal results) a major tenant of the 1984 election which both the economists and politicians of the day failed to do.

The 1980s should be seen as the triumph of Keynesianism, but since there were clearly no great economists in that era a golden opportunity to make some amazing papers on what types of policies should be practiced in different times. This needs to be public knowledge, and the policy that Reagan did that really brought the economy to recovery was Keynesian policies. It is unbelievable we took this recession as proof that neoliberal policies work because we should take the exact opposite meaning out of it.

Unemployment: http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_#!ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:S&scale_y=lin&ind_y=false&rdim=country&idim=country:US&ifdim=country&tstart=202287600000&tend=728380800000&hl=en_US&dl=en_US&ind=false

Interest rates: http://research.stlouisfed.org/fred2/graph/?id=FEDFUNDS

Reagan's tax policies of the era:

Tax cuts that preceded recession: http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981

Tax increases that preceded recovery: http://en.wikipedia.org/wiki/Tax_Equity_and_Fiscal_Responsibility_Act_of_1982

A pig is a pig by any other name

Whatever you call it, laissez-faire, Reaganomics, austerity, corporatism, or something else, that model of economics supported by many politicians is inherently flawed. The solution this philosophy consistently has to unemployment is to fire public sector workers and bust unions. No incentives for hiring workers, no eliminating barriers to starting small businesses, no health care to those too sick to work, no training for tomorrow's inventors, and cutting basic math, economics, civics, and science from public schools increasing the time the unconnected intelligent youth have until they can start their own businesses successfully.

Austerity teaches that if unemployment is high you increase it, if small business are too rare you limit access to funds by eliminating banking insurance (the opposite approach saved the American financial sector and through that the whole economy in 2008). If this is right it would imply the solution to a drink being too cold is to put ice in it or if your meat is overcooked to keep cooking it, and that -1+-1=0. That adding to a problem will solve it. This is nonsense.

The bloggers of economics that have millions of followers need to start broadcasting this. Suicides are up in Southern Europe. The countries practicing austerity have seen their unemployment rates go up over the past two years and suicides are rising. Lives of real people are at stake in this experiment that is as unsuccessful as it was between 1929 and 1933 when America did the same thing. The longer it is done the longer the recovery will be. This is very not funny. Wake up world. All the data you need to prove this is free on google data.

How Europe will get out of the austerity crisis

This current austerity crisis in Europe is hurting their economy. When I look at their economies, since austerity began in 2009, unemployment has risen across the European Union, decreasing consumer spending, hurting the economy and all businesses big and small. (Source: Public Data) I am going to say what I think will drive Europe out of this crisis and back towards investment and prosperity. In the meantime decreasing debts, which I see as a minor issue at most. The debt of these countries was blown out of proportion by economic neoconservatives like Merkel, News Corportation, and Sarkozy, among others.

1. Germany will vote in a left-wing government next year in September 2013 which will change the course of history. Merkel's push for divestment has hurt the economy of Europe and she will not be ranked highly in the future. Peter Steinbruck will be the next Chancellor of Germany. Most of the CDU's wins were by small margins: http:/s/en.wikipedia.org/wiki/File:Bundestagswahl2009_Zweitstimmen.svg so seeing a big flip with Merkel's misleadership over the past two years is possible. This will end a lot of pressure on Spain, Portugal, Italy, and Greece.
2. Europeans will vote for a liberal government in European Parliament in 2014 following their dissatisfaction with austerity and losing their jobs which will move the EPP (right-wing) to a minority and S&D (left-wing) to become the largest party in Parliament.
3. The European Parliament will propose an amendment to their constitution which will do the following to resolve the apparent issues of the European Union:
1. Banking regulations and insurance will be union-wide to avoid future bank runs from nations like Greece. (Source: Planet Money from NPR)
2. The regulations on debt will remain, but they will be required to cut social services last and raise taxes first. Looking at America's history this is clearly the most economical viable way. The fastest growing economies in American history were during the 1950s when our highest tax rate was above 70% and the 1990s when Clinton and Congress ran a balanced budget and taxes were higher than they are now on the rich.
3. There will be an investigation into bribery in the government participating most in this fiasco (Germany, Spain, Italy, Greece) which will come out with a lot of evidence to prosecute big companies, banks, and important politicians. Elections will happen across Europe. People will vote in better governments. Companies will be liable for bribery across the European Union.
4. The ability to form small businesses will be easier in the nations in Europe where it is lowest (which funny enough are Greece and Spain http://en.wikipedia.org/wiki/Starting_a_Business_Index) which will stimulate their economies. After decreasing barriers of entry in Belarus, their rank went from 98 in 2009 to 7 in 2010 and their GDP growth rate from 0.2% in 2009 to 7.6% in 2010. This is a crucial part of having a competitive economy. There is a clear correlation between the two. This will also help the distribution of wealth become more equitable, which will allow more people to enter into the middle class in Europe which will drive consumer spending higher and make a stronger economy. But it has to start with people having the ability to create their own businesses and make enough money to be comfortable. I just started a small Private Investigating Agency, so I am a small business owner, and like millions of other people I know exactly the level of benefits this brings to individuals, and to the economies that are driven by trade.
4. The EU will still exist, corruption will be less, and their economy will recover. With less bribery through enforcement of already existing laws, their copyright laws (which are the worst in the world) will liberalize, their banking regulations will strengthen the economy to prevent the outflow of cash that came from Greece to Germany and France, and it will happen in the next five years.

Greece, the majority's story and the real story

I was reading the news and saw this article: http://blogs.aljazeera.com/blog/europe/why-greeks-voted-way-they-did

The part that stuck out to me was "Greeks don't like being told what to do." which gives the false impression that Germany is forcing the post-Lisbon Treaty rules down Greece's throat like some sort of new Roman Empire, only now based in Brussels. Nothing could be further from the truth. First, for something like the Lisbon Treaty to come into effect, every member nation needs to affirm it through a national referendum. Greece did this with an overwhelming majority affirming their support to the European Union and a system closer to the Nationalist US Constitution than the pitifully Federalist Articles of Confederation which failed in our own history. That is myth number 1.

So, there is absolutely no doubt in any intelligent person's mind that Greece's economy is collapsing. Here is a report I wrote for myself based on real-world statistics to cover the scope of this problem, and the rest of my conclusions based on the evidence.

The “Debt Crisis”

Statistical overview

Part 1
The Statistics
Current claims of Greece that are widespread on global media are “Their debt is killing their economy”, “The Euro is killing Greece”, among others. The same is being said about Ireland, Spain, Portugal, and Italy. Let’s see if the facts fit this theory.

Statistic 1
The highest indebted nations in the world, Public debt as a percent of GDP are the following: (IMF, 2011 via Google data) (all countries with >100% GDP in debt plus one)

• Japan (229.77%)
• Greece (160.81%)
• Saint Kitts and Nevis (153.41%)
• Jamaica (138.98%)
• Lebanon (136.22%)
• Eritrea (133.82%)
• Italy (120.11%)
• Barbados (117.25%)
• Portugal (106.79%)
• Ireland (104.95%)
• United States (102.94%)
• Singapore (100.79%)
• Iceland (99.79%)

For comparison, Libya has no debt.
Statistic 2
The real GDP growth of the preceding 13 countries. (CIA, World Factbook 2011)

• Eritrea 8.2% (#11)
• Singapore 5.3% (#62)
• Iceland 2.4% (#127)
• Barbados 1.8% (#142)
• Saint Kitts and Nevis 1.5% (#151)
• Jamaica 1.5% (#151)
• Lebanon 1.5% (#151)
• United States 1.5% (#151)
• Ireland 1.1% (#162)
• Italy 0.6% (#172)
• Japan -0.5%
• Portugal -2.2% (#182)
• Greece -6%

Libya has a GDP growth rate of 10.6%. (International Monetary Fund, 2010) Not far ahead of Eritrea.

The 10 fastest growing economies in the world (CIA, World Factbook 2011)

1. Qatar
2. Ghana
3. Mongolia
4. Turkmenistan
5. Iraq
6. China
7. Papua New Guinea
8. Argentina
9. Turkey
10. Sri Lanka

Libya is not included in this, but would be ahead of Sri Lanka in 2010, in 2011 its growth shrunk considerably. ( http://www.bbc.co.uk/news/business-12523038 )

Statistic 3
Unemployment of the 13 most indebted nations if available, along with their trend. (IMF and Eurostat 2012, from Google data)

1. Spain (24.3%)
2. Greece (19.37%) at the peak, expected to decrease
3. Ireland (14.45%) at the peak, expected to decrease
4. Portugal (14.43%) at the peak, expected to decrease
5. Jamaica (13%) steady
6. Barbados (11%) just past the peak, expected to decrease
7. Italy (9.5%) Expected to peak in 2014 at 9.82%, then decrease
8. United States (8.16%) peaked in 2010, decreasing
9. Iceland (6.3%) Peaked in 2010, decreasing
10. Japan (4.5%) steady
11. Singapore (2.14%) steady

Libya had an unemployment rate of 30% in 2004, along with an extremely tiny debt by any measure. (CIA World Factbook)

Statistic 4
European nations by size of surplus or deficit (CIA, 2011, USD) Euro nations underlined, EU members italicized.

1. United Kingdom (-$202 billion)
2. France (-$149 billion)
3. Spain (-$130 billion)
4. Italy (-$97 billion)
5. Netherlands (-$39.1 billion)
6. Germany (-$37 billion)
7. Greece (-$30 billion)
8. Belgium (-$22.3 billion)
9. Ireland (-$22 billion)
10. Austria (-$14 billion)
11. Turkey (-10.4 billion)
12. Poland (-$8.3 billion)
13. Czech Republic (-$8.1 billion)
14. Romania (-$7.8 billion)
15. Ukraine (-$6.4 billion)
16. Slovakia (-$5.8 billion)
17. Slovenia (-$2.2 billion)
18. Lithuania (-$2.11 billion)
19. Serbia (-$2 billion)
20. Cyprus (-$1.62 billion)
21. Latvia (-$1.1 billion)
22. Finland (-$800 million)
23. Georgia (-$660 million)
24. Albania (-$465 million)
25. Kosovo (-$320 million) unofficial user
26. Montenegro (-$200 million) unofficial user
27. San Marino (-$58.3 million)
28. Luxembourg (-$39 million)
29. Monaco (-$3 milllion)
30. Vatican City ($13 million)
31. Andorra ($14 million)
32. Moldova ($24 million)
33. Liechtenstein ($83 million)
34. Bosnia and Herzegovina ($549 million)
35. Belarus ($1 billion)
36. Croatia ($2.4 billion)
37. Switzerland ($3.4 billion)
38. Russia ($6.6 billion)
39. Norway ($71 billion)

Libya ($0) (IMF via Google Data)

Statistic 5
Populations and deficit per capita. (Wikipedia which is from each nation’s census data)

• Ireland $4794.85
• United States $4,350
• United Kingdom $3,244.35
• Spain $2754.79
• Greece $2,727.27
• Netherlands $2320.89
• France $2,280.03
• San Marino $1828.33
• Austria $1663.77
• Italy $1598.51
• Cyprus $1473.61
• Slovenia $1073.07
• Slovakia $1065.13
• Czech Republic $766.88
• Lithuania $662.30
• Latvia $496.15
• Germany $451.22
• Romania $409.60
• Montenegro $319.86
• Serbia $280.87
• Poland $217.35
• Kosovo $184.56
• Albania $164.21
• Finland $147.87
• Georgia $147.68
• Ukraine $139.47
• Turkey $139.18
• Monaco $83.37
• Luxembourg $76.61

Libya $0 (IMF via Google Data)

Remarks

This shows a striking difference from what we will see in the media. Greece is always talked about having such a large deficit, yet they have 1/20th that of the prosperous United Kingdom. This is undisputed among reliable sources. How then does Greece have such a large debt? My hypothesis the marvel of compound interest. If Greece borrows $30 billion a year over fifteen years, and owe 10% on those accounts, then it adds up to $495 billion, and their GDP is about $300 billion, which fits. 160% of $300 billion is $480 billion. The UK on the other hand, has a debt worth 82.5% of their GDP, with a $2.5 trillion GDP is a $2.06 trillion dollar debt, 4.3 times the size of Greece’s debt.

Perhaps all the European Union needs to do is change their rules on the maximum size of public debt and further distress can be diverted. It is in the hands of Merkel and Sarkozy.

It is also hypocrytical for them to talk about Greece when in reality, being such a small country compared to the countries in Europe, their deficit is far smaller than those other nations. The amount the average Greek would add to their taxes to balance the budget is ⅔ that of what every Briton would have to add to their taxes to balance their own budget, but people don’t talk about it. The media doesn’t mention it. Their debt burden is far below Japan, which is really not much higher than it was before the earthquake, the debt burden then was 160% of their GDP, what Greece is now, and their economy despite having a deficit over twice the value of their economy is still relatively strong. Other factors are at play.

If you look at Greece what you see is consumer confidence with Greek banks is in the toilet, while they are not with Germany. This mindset has gone viral across the world, and we are currently seeing a bank run. More than this, it is from people abroad, in other words, divestment. With little to no equity and the government running out of funds due to the bank run, there is no one to bail out these banks and give them equity so that their depositors can continue to receive their interest and lending can continue from the banks. With no equity, this becomes impossible, and this has happened before in the United States. This is the same reason why people looking for a solution to the Israeli-Palestinian conflict speak of divesting from Israel, because that strategy in Greece is killing their economy. With less lending power, small businesses are unable to begin (which are one of the major drivers of economic growth in every economy) due to lack of credit, and unemployment rises to almost 20% due to lack of jobs due to lack of credit due to the bank run.

This has happened before in the United States. The bank runs of the pre-Federal Reserve era when the American government contracted the printing of currency to banks saw many bank runs as people were (rightfully) never confident in banks and our domestic economy was weak for over 30 years from the end of Reconstruction to the beginning of the Federal Reserve. If we (America) wanted to see our number one trading partner in terms of gross value of goods stay up, we would use our influence to work with brokering a solution between the Europeans and find an answer. If Europe goes, the rest of the world goes. If the European Union were a nation they would have the largest GDP in the world, and have trade with practically (if not literally) every nation in the world. They must not fall.

The solution needs to include breaking a deal that Europe will reanalyze their banking system and merge their banking deposit insurance mechanisms on a union level to prevent future problems. The Greeks need to pay slightly more in taxes, to decrease the amount they will soon need to pay to the people who bought Greek bonds around the world, and then they can spend more on education and health care, or pay less in taxes. Nevertheless, confidence in Greece must be restored. There is no option in this.

The current path they are following is austerity, to put as many government employees as they can on unemployment insurance (how much money will this really save?) and cut back on services. Through this policy of unemploying people Greece is seeing an unemployment of over 20% and growing. Before austerity began in 2009 their unemployment was on par with the average of the European Union. In fact, before austerity, Greece’s unemployment had been below Germany for four years! (Google Data) Austerity changed all that by firing government workers. Once the government workers are all fired, they don’t have as much purchasing power and the private sector loses revenue. The current neoconservatives in Europe and the United States use the same policy with deficits. Here is the question to show why this policy has never worked (The recession in the beginning of the Reagan years was due to skyrocketing oil prices that shocked the economy):

1. You are running a business and are running a deficit. What do you do?
1. Cut revenue.
2. Find ways to increase revenue.
3. Cut spending.
4. Find better marketing strategies.
2. You are running a government and are running a deficit due to a bad economy. What do you do?
1. Cut revenue.
2. Find ways to increase revenue.
3. Cut spending.
4. Use your power to increase the amount of money in the economy to prevent a bank run. Increase employment by hiring temporary government workers to upgrade aging infrastructure.

The answers to the questions:

1. You are running a business and are running a deficit. What do you do?
1. By cutting revenue your net profit will continue to shrink. You will need to close store fronts and you will lose potential revenue when your market is in better days, at that point you will be beaten by the competition.
2. You will get more money and bring your business afloat.
3. Your business will shrink. By closing store fronts you will lose potential revenue for when your market turns around.
4. By marketing better more people will know about your business and you can get more customers.
2. You are running a government and are running a deficit. What do you do?
1. By cutting revenue your deficit will expand. You will owe whatever you don’t make now (+ interest) later and need to make extra revenue anywhere from 6 months to 30 years from now.
2. By increasing revenue your deficit will shrink.
3. By cutting spending you will probably fire a lot of employees who will then move on to unemployment which as the government you will have to pay. Their loss of purchasing power will expand to the private sector through less revenue for businesses. See: Great Depression.
4. By decreasing unemployment more people will keep their houses, have purchasing power, and be able to continue to live their lives regularly. With the money continuing to flowing steady, you have the definition of a healthy economy. Businesses will not shrink and employees will have the means to start their own business if they wish. By hedging the bank’s equity they will continue to have money to pay their depositers interest which will mean that the chance of a bank run is diminished greatly.

Notice the similarity of these two questions, they are the same question, all I changed was which sector is getting less workers. Every good businessman will have the same answer to question 1, (there are two correct answers which together can bring a company to the Fortune 500 list) increase revenue or improve marketing, however, while Democrats will continue those answers in Question 2, b and d, Republicans will answer with a and c which are the wrong answers to the first question. Since the questions are practically the same, the answers shouldn’t change. If we look at Greece we see this is the case. Austerity in business and austerity in Government have the same reaction. Higher unemployment, more uncertainty, and collapsing profits for businesses. Just like how the Great Depression began.

If Merkel really wanted to improve the situation in Europe she would convene an emergency session of parliament to discuss solutions with the other nations of the European Union and be bold and fix these current issues. She will do the strategy a businessman would do, to increase revenue and stop laying off workers. It has never worked before, and it isn’t working now. They would switch to a Keynesian model to increase employment to increase government revenue to cover the deficits, increase confidence in investors, rein in the deficit, and keep their economies running. (I wrote this in May, a month before she started moving, basically, I was right.)

The only difference in the root cause of the crisis between Greece and Germany is the level of austerity. That is what the statistics tell us.