Wednesday, July 14, 2010

Spending is futile

The Wall Street Journal editorial page uses forecasts of a modest positive impact of Spain's World Cup win on its economy to prove, to its own satisfaction, that it doesn't matter how much money is spent in any economy --

But there's no such thing as a free celebration, and the money spent celebrating Sunday's 1-0 victory over Holland is, by definition, not available for spending on other things. A household that buys a crate of bubbly to toast Andres Iniesta will certainly improve the wine merchant's fortunes, but probably at the expense of someone else—perhaps a carpenter who had been booked to perform repairs, or wages for a cleaning lady.

To put it another way, winning the World Cup does not expand the Spanish economy's productive capacity, and so the euros spent celebrating have to come from somewhere—either forgone consumption elsewhere, or reduced savings, or increased debt.

So far, so supply side enough. But there's more ...

The labor market for Spain's World Cup heroes may be brighter than ever, but their victory will do nothing for the 20% of the Spanish work force that is currently unemployed. For them, loosening up Spain's still-rigid labor market would do a lot more good than any national party.

Mention of Spain's 20 percent unemployment is where things get crazier than Nigel de Jong's kung fu tackle on Xabi Alonso. Because if Spain's problems were so deep-rooted, you'd expect its unemployment rate to have always been 20 percent.

Two years ago, it was 11 percent.

Which yes, is a tad high for a booming economy but it's a lot less than 20. So why did unemployment go up so much? Because people stopped spending due to the financial crisis. A little World Cup celebrating in that context is just what the doctor ordered.

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