What if Europe and the US converged on a set of economic policies that brought out the worst in both – European fiscal austerity combined with a declining share of total income going to workers? Given political realities on both sides of the Atlantic, it is entirely possible.

So far, the US has avoided the kind of budget cuts that have pushed much of Europe into recession. Growth on this side of the pond is expected to be around 2.4 per cent this year. And jobs are recovering, albeit painfully slowly.

But a tough bout of fiscal austerity could be coming in six months. The non-partisan Congressional Budget Office warned last week that if the Bush tax cuts expire on schedule at the start of 2013, just as $100bn of budget cuts automatically take effect under the deal to raise the debt ceiling that Democrats and Republicans agreed to last August, the US will fall into recession in the first half of next year.

Even if these measures were to reduce the cumulative public debt, a recession would increase the debt as a proportion of gross domestic product – making a bad situation worse. That is the austerity trap much of Europe now finds itself in.

Meanwhile, real wages in the US continue to fall. A new “World Outlook” released by the International Monetary Fund last Friday showed that in the three years since the depths of the downturn in 2009, total national income has rebounded in most of Europe and in the US. But the share of national income going to workers has fallen sharply in the US, while rising in Europe as a whole.

The trend is even more striking measured from the start of the recession. It used to be that when a downturn began, profits fell faster than workers’ income because companies were reluctant to lay off employees and couldn’t easily cut wages given union contracts or the threat of unionization.

That is still the case in Europe, courtesy of stronger unions and labor-market ...

Austerity was the big loser in the Greek elections on Sunday. The two main Greek parties, who endorsed the austerity pact signed last year, together got just over one-third of the vote. This is an extraordinary rebuke given that between them, these parties have governed Greece since the end of the dictatorship in 1976.

On the anti-austerity side, a left-wing coalition came in second with around 17 percent of the vote. More ominously, a far right anti-immigrant party, which is also anti-austerity, received almost 7 percent of the vote.

It is important for people elsewhere in the world, and especially in Europe, to understand that the Greek voters were not just being cranky kids who refuse to take their medicine. There is no doubt that Greece’s government and economy were poorly managed in the years leading up to the crisis.

However the current path of austerity does not offer the country a path to a better future. The current path of austerity is simply a path of pain as end in itself. This can be seen from examining the official projections.

The IMF now projects that 2012 will be Greece’s fifth successive year of economic contraction, with 2013 being a year of stagnation. Even with growth projected to resume again in 2014, Greece’s per capita income is still projected to be more than 8.0 percent lower than it was a decade earlier. Its unemployment rate, which is currently hovering near 20 percent, is still projected to be almost 15 percent in 2017. And, its debt to GDP ratio is projected to be 137 percent in five years, far higher than it was at the onset of the crisis.

This is not a path to a healthy economy. ...

This year’s annual meeting of the International Monetary Fund made clear that Europe and the international community remain rudderless when it comes to economic policy. Financial leaders, from finance ministers to leaders of private financial institutions, reiterated the current mantra: the crisis countries have to get their houses in order, reduce their deficits, bring down their national debts, undertake structural reforms, and promote growth. Confidence, it was repeatedly said, needs to be restored.

It is a little precious to hear such pontifications from those who, at the helm of central banks, finance ministries, and private banks, steered the global financial system to the brink of ruin – and created the ongoing mess. Worse, seldom is it explained how to square the circle. How can confidence be restored as the crisis economies plunge into recession? How can growth be revived when austerity will almost surely mean a further decrease in aggregate demand, sending output and employment even lower?

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This we should know by now: markets on their own are not stable. Not only do they repeatedly generate destabilizing asset bubbles, but, when demand weakens, forces that exacerbate the downturn come into play. Unemployment, and fear that it will spread, drives down wages, incomes, and consumption – and thus total demand. Decreased rates of household formation – young Americans, for example, are increasingly moving back in with their parents – depress housing prices, leading to still more foreclosures. States ...

Nearly four years after the start of the global financial crisis, many are wondering why economic recovery is taking so long. Indeed, its sluggishness has confounded even the experts. According to the International Monetary Fund, the world economy should have grown by 4.4% in 2011, and should grow by 4.5% in 2012. In fact, the latest figures from the World Bank indicate that growth reached just 2.7% in 2011, and will slow this year to 2.5% – a figure that may well need to be revised downwards.

There are two possible reasons for the discrepancy between forecast and outcome. Either the damage caused by the financial crisis was more serious than people realized, or the economic medicine prescribed was less efficacious than policymakers believed.

In fact, the gravity of the banking crisis was quickly grasped. Huge stimulus packages were implemented in 2008-9, led by the United States and China, coordinated by Britain, and with the reluctant support of Germany. Interest rates were slashed, insolvent banks were bailed out, the printing presses were turned on, taxes were cut, and public spending was boosted. Some countries devalued their currencies.

As a result, the slide was halted, and the rebound was faster than forecasters expected. But the stimulus measures transformed a banking crisis into a fiscal and sovereign-debt crisis. From 2010 onwards, governments started to raise taxes and cut spending in response to growing fears of sovereign default. At that point, the recovery went into reverse.

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Politicians in the United States must ritualistically assert that the United States is and always will be the worlds leading economic, military and political power. This chant may help win elections in a country where respectable people deny global warming and evolution, but it has nothing to do with the real world.

Those familiar with the data know that China is rapidly gaining on the United States as the world’s leading economic power. According to data from the International Monetary Fund (IMF), China’s economy is currently about 80 percent of the size of the U.S. economy. It is projected to pass the United States by 2016.

However, there is a considerable degree of uncertainty about these numbers. It is difficult to accurately compare the output of countries with very different economies. By many measures China is already well ahead of the United States.

It passed the U.S. as the world’s biggest car market in 2009. In most categories of industrial production it is far ahead of the United States and it is a far bigger exporter of goods and services. The number of people graduating college each year with degrees in science and engineering far exceeds the number in the United States. And China has nearly twice as many cell phone and Internet users as the United States.

China still has close to half of its population living in the countryside. The living standard of the 650 million people living in rural areas is much lower than in urban areas and also much more difficult to measure. The main reason that living standards are difficult to gauge is that prices are much lower in rural areas.

A new ...

In an open letter sent to the Bank's executive board Wednesday, 39 former senior Bank staff endorsed Okonjo-Iweala's candidacy, citing her "deep experience in international and national issues of economic management", which includes four years as the Bank's managing director. 

"She would hit the ground running and get things done from the start," the former officials, who included senior vice presidents, vice presidents, and directors, wrote. "In a word, she would be the outstanding World Bank President the times call for." 

In another letter released Thursday, more than 100 economists endorsed Ocampo, arguing that his experience leading the ministries of finance, agriculture and planning, as well as stints as the head of the Economic Commission for Latin America and the Caribbean, the U.N. Commission for Latin America and the Caribbean, and as U.N. under-secretary general for economic and social affairs, made him "the most suitable candidate for World Bank President". 

The signers included internationally recognized figures, primarily from North America, Latin America, Europe, China, and India, including former Bank officials, ministers of finance and development, and central bank governors, as well as academics. 

The endorsements are coming as the Bank's executive board prepares to interview all three candidates early next week and reach a final decision the following week, by the opening of the annual Spring meetings of the Bank and its sister institution, the International Monetary Fund (IMF). 

The current race is the first since the Bank was created at the Bretton Woods conference in ...

In a surprise to many development and finance experts here on Friday, U.S. President Barack Obama nominated Jim Yong Kim, a relatively unknown but highly regarded international health specialist to become the next president of the World Bank.

"It's time for a development professional to lead the world's largest development agency," Obama said as he introduced Korean-born Kim, a co-founder of Partners in Health who currently serves as president of Dartmouth College, in a brief appearance in the White House Rose Garden.

If approved by the bank's governing board, Kim, who immigrated to the United States with his family at the age of five and, among other posts, headed the World Health Organization’s HIV/AIDS department, will succeed Robert Zoellick as the head of the world's biggest multilateral development institution.

But for the first time in the bank's history, it appears that the U.S. nominee will face two strong challengers. The Nigerian Finance Minister, Ngozi Okonjo-Iweala, who served as the bank's managing director from 2007 to 2011, was formally nominated by South Africa earlier this week.

José Antonio Ocampo, who has served as U.N. Under-Secretary-General for Economic and Social Affairs and as Colombia's finance minister, was also nominated, after a period of much speculation.

Another candidate, Columbia University's Earth Institute president Jeffrey Sachs, withdrew from contention shortly after Kim's nomination was announced.

"I congratulate the administration for nominating a world-class development leader for this position," Sachs, who was nominated by at least three poor countries – Bhutan, Haiti and Timor Leste – and who had openly campaigned for the job, said in a statement. "I support his nomination 100 percent."

No break ...

Greece is bracing for protests after eurozone finance ministers concluded a deal that will provide a $170 billion bailout in return for another round of deep austerity cuts. The bailout is opposed by several unions and left-wing groups in Greece over new cuts and layoffs imposed on public sector workers. We’re joined by Paul Mason, economics editor at BBC Newsnight and author of the new book, "Why It’s Kicking Off Everywhere: The New Global Revolutions." He has just returned from Greece. "What makes the headlines are, of course, the riots," Mason says. "What doesn’t make so many headlines is what is happening to real people... We are living in a time where the world has, in the last couple of years, erupted in a way that many people thought they would never see again since the 1960s... The underpinnings of this new global unrest are that...people are sick of seeing the rich get richer during a crisis."

Transcript:

NERMEEN SHAIKH: We turn now to ...

Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots.

Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds.

Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just  want to protect their bets and not wait around for Greece to really stabilize for repayment.

Prior to the Great Depression, the Greek economy experienced years of growth, a healthy commercial activity spree, and like today, a stark increase in (less-leveraged) bank loans to finance it. When the Depression struck, banks and local businesses faced unpayable loans and ...

According to European mainstream economists and politicians, the solution to the Greek debt crisis, and the only option for returning the country to a path of progress, is 'fiscal consolidation'.

But for the Greek masses, the word ‘austerity’ has meant the demise of labor, economic and human rights and the dismantling of an inefficient yet crucial social welfare system.

In a last ditch attempt to secure an additional bailout loan of 130 billion dollars from the Troika (a mechanism comprised of the International Monetary Fund, the European Central Bank and the European Commission), Greece has capitulated to the austerity plan forced upon it by the international community, hoping to escape bankruptcy.

The latest phase of the plan included cutting 150,000 public sector jobs, overturning existing labor laws, slashing pensions and reducing monthly minimum wages by 20 percent, from 751 euros to 600 euros.

Workers under 25 years of age have been asked to take a bigger – 30 percent – salary cut.

Parliament ushered in the fresh ‘bout of austerity’ on Feb. 12 amid increasing violence across the city. Mobs of newly impoverished Greeks took to the streets, setting Athens ablaze and offering yet another spectacle to the international media.

Meropi Andriopoulou, a medical officer involved in the national health system since 1989, who often joins the demonstrators, believes that ordinary Greeks only stand to lose more from the neoliberal structural adjustment policies (SAPs) imposed on the country.

"Greece was a country with universal healthcare. Now, many of the people who show up in public hospitals can’t even afford the five-euro general admission fee introduced two years ago. Ten percent of patients don’t even have insurance," she said.

"Spending your days in a public hospital (highlights the degree of) social exclusion. Our healthcare system has ...

A global coalition of development activists and non- governmental organizations (NGOs) is calling on the World Bank's governors to ensure that Bank President Robert Zoellick's successor is chosen in an "open and merit-based process" that will give borrowing countries a major say in the selection.

 

In an open letter released shortly after the Bank's announcement Wednesday that Zoellick will step down at the end of his five-year term in June, some 60 groups and activists from around the world said any candidate should gain the "open support" of at least the majority of World Bank member countries and of the majority of low- and middle-income countries that make up most of its borrowers. 

 

"As the Bank only operates ...

One of our era’s foundational myths is that globalization has condemned the nation-state to irrelevance. The revolution in transport and communications, we hear, has vaporized borders and shrunk the world. New modes of governance, ranging from transnational networks of regulators to international civil-society organizations to multilateral institutions, are transcending and supplanting national lawmakers. Domestic policymakers, it is said, are largely powerless in the face of global markets.

The global financial crisis has shattered this myth. Who bailed out the banks, pumped in the liquidity, engaged in fiscal stimulus, and provided the safety nets for the unemployed to thwart an escalating catastrophe? Who is re-writing the rules on financial-market supervision and regulation to prevent another occurrence? Who gets the lion’s share of the blame for everything that goes wrong? The answer is always the same: national governments. The G-20, the International Monetary Fund, and the Basel Committee on Banking Supervision have been largely sideshows.

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It is now increasingly clear that what started in late 2008 is no ordinary economic slump. Almost four years after the beginning of the crisis, developed economies have not managed a sustainable recovery, and even the better-off countries reveal signs of weakness. Faced with the certainty of a double-dip recession, Europe’s difficulties are daunting.

Not only is Europe running the risk of lasting economic damage; high long-term unemployment and popular discontent threaten to weaken permanently the cohesiveness of its social fabric. And, politically, there is a real danger that citizens will stop trusting institutions, both national and European, and be tempted by populist appeals, as in the past.

Europe must avoid this scenario at all costs. Economic growth must be the priority, for only growth will put people back to work and repay Europe’s debts.

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 In his classic Fable of the Bees: or, Private Vices, Publick Benefits (1724), Bernard Mandeville, the Dutch-born British philosopher and satirist, described – in verse – a prosperous society (of bees) that suddenly chose to make a virtue of austerity, dropping all excess expenditure and extravagant consumption. What then happened?

The Price of Land and Houses falls;

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The markets (read: traders with big books at mega financial firms and hedge funds) weren’t particularly shocked by last week’s wave of heavily pre-broadcast S&P sovereign debt downgrades. For months, the question wasn’t ‘if’, but ‘when.’ True to form, just as with the US downgrade, S&P’s reasons skated the surface of prevailing wisdom – governments have too much debt, and not enough income. That’s only a fraction of the story.

Nowadays, when any sovereign (including the US) gets downgraded by a rating agency, it's not just because its debt repayment ability is questionable (the publicized logic of rating agencies), but because it incurred more expensive debt to float its banking system. It chose to subsidize banks over people.

The S&P likes moving on Friday nights. It was on a Friday night that it downgraded US debt to AA+ from AAA. On Friday night, January 13, 2012,  it downgraded France and Austria from AAA to AA+, and 7 other European countries, too; Cyprus, Italy, Portugal, and Spain by two notches; Malta, Slovakia, and Slovenia, by one notch. Portugal, Cyprus, Ireland and Greece are at junk status. Germany’s AAA rating is intact.

Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked:

1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other ...

This is the time of year when we're reminded of all the famous people who died over the last twelve months, a list which includes two of my favorite guitar players (Hubert Sumlin and Cornell Dupree). But there were also some notable non-human deaths in 2011, especially in the world of economic policy.

One of those deaths should have completely altered the political debate in Washington. The name of the deceased was "Austerity Economics," and it was first glimpsed in a 1921 paper by conservative economist Frank Wright. Austerity died of natural causes brought on by prolonged exposure to reality.

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At this point the sovereign debt crisis in Europe is almost getting boring. We’ve seen the same script played out over and over with country after country. The basic story is the markets begin a run on the debt of a country: Greece, Ireland, Italy, Spain etc.

The troika, the European Central Bank (ECB), the European Union (EU), and the International Monetary Fund (IMF) then demand a series of austerity measures. In addition, they sometimes demand measures unrelated to fiscal policy, such as a lower minimum wage in Ireland or weaker employment protection legislation in Italy, that are intended to weaken workers’ bargaining power. As a quid pro quo, the troika then arranges enough bond purchases or other supports to get through the immediate crisis.

Of course these measures don’t actually solve the underlying problem. If the troika took the steps needed to ensure that the indebted countries got past this crisis, it would lose the ability to demand further austerity and other steps that weaken welfare state supports for workers. The troika is not willing to give up its leverage at this point.

That is why the ECB repeatedly declares its refusal to guarantee support for sovereign debt any time it seems as though the financial markets believe that it is committed to supporting the debt of the troubled borrowers. This insistence by the ECB, coupled with the other policies it pushes to stifle growth, ensures that the crises will continue. The same countries will have to keep coming back for another dose of punishment and new countries will be added to the list as the contagion of slumping demand, deteriorating bank balance sheets, and dwindling confidence spreads.

The negotiating teams at the troika surely must know that the path they are following can only lead to further crises. Their medicine of austerity is irrelevant to the disease that is afflicting the debt-burdened countries.

Most immediately they are suffering ...