Wednesday, May 2, 2012

The Euro Zone is learning they can't shrink their way to prosperity

I wonder if the budget hawk Tea Party is watching events unfold in Europe.  After all, the dream of the Tea Party and the GOP has been to hack and slash spending in order to reduce budget deficits, the same remedy that Europe has subscribed to the last few years.  Well, it turns out that you can't fix an economy by shrinking it into recession.

Eurozone Unemployment hits Record High..

Unemployment in the eurozone rose by 169,000 in March, official figures showed Wednesday, taking the rate up to 10.9 percent — its highest level since the euro was launched in 1999. The seasonally adjusted rate was up from 10.8 percent in February and 9.9 percent a year ago and contrasts sharply with the picture in the U.S., where unemployment has fallen from 9.1 percent in August to 8.2 percent in March. Spain had the highest rate in the eurozone, 24.1 percent — and an alarming 51.1 percent for people under 25.
Austerity has been the main prescription across Europe for dealing with a debt crisis that's afflicted the continent for nearly three years and has raised the specter of the breakup of the single currency. Three countries — Greece, Ireland and Portugal — have already required bailouts because of unsustainable levels of debt.
Eight eurozone countries, including Greece, Spain and the Netherlands, have seen their economies shrink for two straight quarters or more, the common definition of a recession.
Economies are contracting across the eurozone as governments cut spending and raise taxes to reduce deficits. That has prompted economists to urge European Union policymakers to dial back on short-term budget-cutting and focus on stimulating long-term growth.
"The question is how long EU leaders will continue to pursue a deeply flawed strategy in the face of mounting evidence that this is leading us to social, economic and political disaster," said Sony Kapoor, managing director of Re-Define, an economic think-tank and policy advisory company.

This is the same strategy that Mitt Romney and anyone else who wants to be a somebody in the GOP/Tea Party  have proposed to fix the USA's budget deficit.  Slash, baby, slash.  Heck, Texas Governor Rick Perry was so excited about eliminating entire Federal Departments, he couldn't even remember all of the Departments he would have axed.  Likewise, Ron Paul wants to cut entire Federal departments and his budget plan didn't even show what would happen to the tens of thousands of displaced employees, seeing as the same budget plan showed no additional Federal retirees left in his wake.

Anyone with even a basic working knowledge of how the economy works already knew that a business or a government can not fix budget problems simply by shrinking.  To fix the economy, you have to grow it, not shrink it.  Of course, when you have it drilled in your brain that there is nothing the government can do to spur private sector job growth, shrinking the economy might seem like the best option.

But that assumption is wrong and the shrink strategy is wrong too.  Europe is proof positive.  How long until the Tea Party /GOP are forced to recognize the same?   My guess is that they will not acknowledge this one bit, rather they will double-down on the failed strategy and claim that shrinking didn't work for Europe because it didn't go far enough.

If there is one thing for sure, it is that politicians are unable to acknowledge they were wrong about a strategy.  The story is always the same, it didn't work because it didn't go far enough.  If the medicine doesn't work, just keep increasing the dosage until it does.      

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