WHY INDUCING INVESTMENT AND CREATING JOBS ARE PROVING TO BE SOOO DIFFICULT?

High and stable investment levels create growth and jobs in an economy. Consumption, in itself, does not, unless it is perceived to be strong and permanent. So, there lies the problem with Keynesian policies. In a milieu of high public debt levels, the entrepreneurs will not perceive an increase in open-finance public spending as permanent. They will increase their capacity levels rather than spend on new investment. Of course, the increase in capacity will create some jobs and growth but those will not be of a permanent nature. The multiplier will be low. (Oh sorry, you can “theoretically” raise taxes for the rich to finance the deficit. Please be my guest and try to do that in the politically captured and globally diversified economies of the West!)

Monetary policy, on the other hand, is already proven to be even more futile and transient. Today’s entrepreneur is no fool. Wihout seeing a strong and permanent rise in consumption, she won’t just simply lured by low (or even negative) real interest rates into investment. She needs to see a strong rise in purchasing power of the masses. And, the ephemeral (or shall we say “virtual”) increase in the value of financial assets or real estate does not provide that.

The other sensible option is the balanced-budget multiplier. Here, you make income tax cuts and future-finance them by the increase in VAT and ultimately in corporate tax receipts thanks to a surge in economic activity. In medium term, the public debt levels wil not go higher, and everyone should be happy and more well-off. But, there are a couple of problems with this course of action as well.

First, in order for tax cuts to be effective on consumer demand, they have to be highly regressive in nature (ie. low income groups who are much more prone to spending must benefit way more than high income groups). Needless to say, that is also a sensible policy in terms of income distribution (per Piketty). But, most developed countries’ governments are already captured by the 1% who will ask for the bigger piece of the cake. Also, similar to interest rates, there is a zero lower bound on taxes and it is not, by the way, zero. If people think that the cuts will be followed by commensurate rises in time, the propensity to spend will be very low indeed. (See Japan’s VAT cut-and-raise policy.) That leaves us with more experimental “basic income” policies which will be resisted by even not-so-rich classes as well, I reckon.

The other problem (in terms of investment creating jobs) is a more structural one. Both high wages, but maybe technological advances more so, severely limit both the desired scope and scale of new investments. The scope is limited because less labour-intensive investments are prefered. Scale is limited because, in our digital world, you don’t really need big ticket investments at all. A case in point may be Mojang. A company less than 5 years old with only a couple of dozen employees, it was recently sold to Microsoft for a price of $ 2.5 billion. It represents a huge labour productivity, but very little employment alas. (In the process, its owner, Mr. Persson turned into a member of useless 1% overnight as well.)

WHO WOULD REALLY BENEFIT FROM AN EXTRAVAGANT GERMANY?

The argument that Germany should increase its public spending and thus its inflation rate, so that the troubled South could catch up with her is nonsensical in every respect.

First of all, there is zero to nil chance to convince German authorities to such a conduct. They are happy with their performance and well- being; indeed the recent weakening of the euro will help their cause further (by increasing their already strong outside-eurozone exports) and they simply do not and will not care about the rest. (I know that, as of recent, there are some objections raised regarding the state of the German economy, citing the slow-down in the growth rate and low capital spending. Well, first of all, everything should be judged in a “relative” context. It is inevitable that Germany will face a slow-down vis-a-vis generally poor performance of the World economy. Regarding the capital spending (its gross capital formation is 17% of GDP), a closer look is called for. To start with, its spending on non-income generating investments (mostly, residential construction) is much lower than its neighbors. Hence, in terms of investment that counts (ie. gross private non-residential fixed investment) it is on a par with its peers.)

For a moment, let’s assume that somehow Germans were convinced to fiscal spending. Is this a bad thing, or a good thing for the German economy itself? Well, it will definitely be good for them. They will be renewing some of their old infrastructure, creating further jobs, boosting their economy etc. So, what good is this for the battered South? Some workers coming from Spain and Greece? Maybe, but that is just a weak maybe. Increased imports from the Eurozone neighbors? Fat chance! Germany has all the capacity and resources to build its infrastructure – very little will be outside-resourced. Increased inflation? Barely. The wages will remain stable unless the capacity is really pushed beyond limits. And let’s remember augthies (until the Great Recession) was a pretty well period for Germans in terms of growth. Was there an upward pressure on wages? Nope! Also, some of the fiscal spending should be geared towards pensions and other transfers to German public which will increase their perceived well-being, meaning even less pressure on wages. So, at the end of the day, with increased fiscal spending (which, nevertheless, will never take place) Germany would simply be even more affluent and richer than its Southern neighbors before.

The only way troubled South can recover (part of) its competitiveness is by breaking away from euro. But, let’s be honest: There is absolutely no chance that any of the political incumbents will try that (including Syriza of Greece if they ever come to power).

Ipso facto, the Japanification of Europe is not just imminent, but actually is taking place as we speak.

FRENCH BASHING!

French bashing, next to cricket and football, is the favorite game of the English. (I am not an expert on history, but I suspect it has always been like that.) The front-runner and the flag holder of this game, no doubt, is The Economist magazine. Almost every other issue, you would see either a deragotary remark about French politicians (not that some of them really deserve those remarks!) or a critique of their “mal” economy. (As of late, since their economy is (suppposedly) doing better, they somewhat increased their bashing.) Now, according to pscyhology quotidien, the constant derision of a person is an underlying symptom of “jealousy”.

Well, if your neighbor across the river is more happy, less fatty, incomewise less inequal, socially more liberal, works less, has low cost “zero” emission energy, much better food and wine, higher life expectancy and its politicians publicly bang better girls (just think of Carla Bruni and Hollande’s various liaisons in stark (or shall I say “naked”) contrast to poor and pathetic “dick” (of) Brooks Newmark), as a “morning cold shower” public school boy politician or journalist, you would be jealous, wouldn’t you?  

Of course the whole bashing thing is deeper than that. There is actually an ideological side to it. France has never been an economy driven by neo-liberal principles. They have always been more pragmatic and heterodox in their conduct of the economy. For example, where they see fit, they are not against State-holdership of companies. (The French State has significant stakes in many key sectors such as energy, as well as in banks.) Of course, as of late, thanks to Sarkozy and others, unfortunately they veered off-course somewhat. But, no doubt France still represents a nuisance for the neo-liberal mindeds, or, let’s say, one of the last forts to be conquered (a Masada perhaps).