By Richard Ebeling
The European Central Bank has announced its intention to create out of thin air over one trillion new euros from March 2015 to September 2016. The rationale, the monetary central planners say, is to prevent price deflation and “stimulate” the European economy into prosperity.
The only problem with their plan is that their concern about “deflation” is a misguided fear, and printing money can never serve as a long-term solution to bring about sustainable economic growth and prosperity.
Europe’s High Unemployment and Economic Stagnation
The European Union (of which the euro currency zone is a subset) is experiencing staggering levels of unemployment. The EU as a whole has 10 percent of the work force unemployed, and 11.5 percent in the eurozone.
But breaking these numbers down to the national levels shows just how bad the unemployment levels are in the different member countries. In Greece it is nearly 26 percent of the work force. In Spain, it is 24 percent; Italy and Portugal are both over 13 percent. France has over 10 percent unemployment, with Sweden at 8 percent. Only Germany and Austria have unemployment of 5 percent or less out of the 28 member countries of the European Union.
Youth unemployment (defined as those between 16 and 25 years of age unable to find desired work) is even more catastrophic. For the European Union as a whole it is an average of over 22 percent, and more than 23 percent in the eurozone.
In Greece, it’s almost 60 percent of those under 25; in Spain, it is nearly 55 percent, with Italy at 43 percent and over 22 percent in both France and Sweden. Only in Norway and Germany is youth unemployment less than 8 percent. Almost all the other EU countries are in the double-digit range.
At the same time, growth in Gross Domestic Product for the European Union as a whole in 2014 was well below one percent. Only in the Czech Republic, Norway and Poland was it above 2 percent among the EU members.
Consumer prices for the EU averaged 0.4 percent in 2014, with most of the member countries experiencing average consumer price increases between 0.2 and 2 percent for the year. Only in Greece was the average level of prices calculated as having absolutely declined by a minus 1.3 percent. Hardly a measured sign of dramatically suffered price deflation in the EU or the eurozone!
Fears of Price Deflation are Misplaced
The monetary central planners who manage the European Central Bank are fearful that the eurozone may be plagued by a prolonged period of generally falling prices if they do not act to push measured price inflation towards their desired target of around two percent a year.
(It is worth pointing out that if the eurozone monetary central planners were to succeed with their goal and maintain 2 percent average annual price inflation, this would mean that over a 20-year period, the purchasing power of a euro would decline by around 50 percent.)
Many commentators inside and outside of the European Union and the eurozone have insisted that price deflation needs to be prevented or reversed at all costs. The implicit premise behind their arguments is that deflation equals economic depression or recession, and therefore any such decline in prices in general must not be allowed.
In all these discussions it is often ignored or forgotten that annual falling prices can well be an indication of economic prosperity and rising standards of living. For instance, between 1865 and 1900, prices in general in the United States declined by around 50 percent, with overall standards of living in general estimated to have increased by 100 percent over these 35 years. This period is usually recognized as America’s time of rapid industrialization in the post-Civil War era that set the United States on the path to becoming the world’s economic giant through most of the 20th century.
Falling Prices and Improved Standards of Living
A hallmark of an innovative and competitive free market economy is precisely the never-ending attempt by entrepreneurs and enterprisers to devise ways to make new, better and less expensive goods to sell to the consuming public. The stereotypes in modern times have been pocket calculators, mobile phones, DVD players and flat-screen TVs.
When pocket calculators first came on the market in the 1980s, they were too big to fit in your shirt pocket, basically performed only the most elementary arithmetic functions and cost hundreds of dollars. Within a few years they fit in your shirt pocket with space to spare, performed increasingly complex mathematical functions and became so inexpensive that many companies would give them away as advertising gimmicks.
The companies that made them did not proclaim their distress due to the lower and lower prices at which they sold the devices. Cost efficiencies were developed and introduced in their manufacture so they could be sold for less to consumers to expand demand and capture a larger share of a growing market.
In a dynamic, innovative and growing free-market economy there normally would be a tendency for one product after another to be improved in its quality and offered at lower prices as productivity gains and decreased costs made them less expensive to market and still make a profit.
Looking over a period of time, a statistical averaging of prices in general in the economy would no doubt show a falling price level, or “price deflation,” as one price after another experienced such a decline. This would be an indication of rising standards of living as the real cost of buying desired goods with our money incomes was decreasing.
Europe’s Problems are Due to Anti-Market Burdens
Relatively stagnant economies with high rates of unemployment like in the European Union and the eurozone are not signs of deflationary forces preventing growth and job creation. Indeed, since 2008, the European Central Bank has increased its balance sheet through monetary expansion by well over one trillion euros, and prices in the eurozone, in general, have been rising on average between 0.5 and 2 percent throughout this period. Hardly an indication of “deflationary” forces at work.
The European Union’s problems are not caused by a lack of “aggregate demand” in the form of money spending. Its problems are on the “supply side.” The EU is notorious for rigid labor markets in which trade unions limit worker flexibility and workplace adaptiveness to global market change.
Above market-determined wages and benefits price many who could be gainfully employed out of a possible job, because government policies and union power price these potential employees out of the market. Plus, the difficulty of firing a worker once hired undermines the incentives of European companies to want to expand their work forces.
Even a number of international organizations, usually culprits in fostering anti-free-market policies, have pointed out the need for European governments to introduce workplace reforms to free up labor markets in their countries, along with general reductions in regulations on business, rather than hamper entrepreneurial incentives and prevent greater profit-oriented competitiveness.
Creating a Trillion Euros Will Only Imbalance Europe More
Creating a trillion more euros cannot overcome or get around anti-competitive regulations, cost-price mismatches and imbalances due to government interventions and union restrictions, or the burdensomeness of taxes that reduce the willingness and ability of businessmen to undertake the enterprising activities that could lift Europe out of its economic malaise.
Furthermore, to the extent to which the European Central Bank succeeds in injecting this trillion euros into the European economy it will only set in motion the danger of another future economic downturn. Not only may it feed an unsustainable financial and stock market run-up. The very manner in which the new money is introduced into the European-wide economy will inevitably distort the structure of relative prices and wages, wrongly twist the patterns of resource and labor uses and induce forms of mal-invested capital.
Thus, the attempt to overcome Europe’s stagnant economy through monetary expansion will be the cause of a misdirection of labor, capital and production that will inescapably require readjustments and rebalances of supplies and demands and price relationships that will mean people living through another recession at some point in the future.
A Market-Based Agenda for Growth and Jobs
What, then, might be a “positive” pro-market agenda for economic recovery and job creation in the European Union – and in the United States, as well, for that matter? Among such policies should be:
- Significantly reduce marginal personal tax rates and corporate taxes, and eliminate inheritance taxes; this would create greater incentives and the financial means for private investment, capital formation and job creation;
- Cut government spending across the board by a minimum of 10 percent more than taxes have been cut so to move the government in the direction of a balanced budget without any tax increases; this would take pressure off financial markets to fund government deficits, and end the growth in accumulated government debt, until finally government budgets would have surpluses to start paying down that debt;
- Reduce and repeal government regulations over the business sector and financial institutions to allow competitive forces to operate and bring about necessary adjustments and corrections for restoring economic balance;
- Institute real free trade through elimination and radical reduction of remaining financial and regulatory barriers to the competitive free flow of goods among countries;
- End central bank monetary expansions and manipulation of interest rates; interest rates need to tell the truth about savings availability and investment profitability for long-run growth that is market-based and sustainable. Monetary expansion merely sends out false signals that distort the normal functioning of the market economy.
A market-based set of policies such as these would serve as the foundation for a sound and sustainable real “stimulus” for the European and American economies. It would also be consistent with the limited government and free-enterprise principles at the foundation of a free society. (my emphasis)
ByRichard Ebeling for The Daily Bell
By permission The Daily Bell