Forget the crisis!, urges Krugman

[ddstory.livejournal.com]

http://www.washingtonpost.com/opinions/the-speed-read-paul-krugmans-end-this-depression-now/2012/05/04/gIQALJl31T_story.html

The governments should finally start spending, Nobel laureate in economics Paul Krugman recommends in his new book End This Depression Now, where he sharply criticizes the austerity programs. So let's look a bit closer.

First of all, Krugman's book is probably coming out in the most appropriate moment. Europe is still writhing in the pains of crisis, and the doubts in the austerity course are getting louder. The troubled European countries are in dire need of perspectives for economic growth. This appeal can be heard from Paris to Rome and from Athens to Madrid. The IMF insists on more growth programs. Meanwhile, the US economy still hasn't fully recovered from the crisis, the unemployment level is 8.3%, which is too high from a US standpoint. Politics could not sustain such a development for too long, Krugman argues in the book.

He's also saying the current situation resembles that of the Great Depression, if we're to look at things in detail. During the Great Depression, a recession situation was reached twice, and twice it was followed by economic growth, but as a whole, unemployment remained too high and the US economy was stuck way below its full capacity. And the present situation resembles that time.

Krugman also gives a negative evaluation for the efforts of the US politicians so far. He's particularly critical about Ben Bernanke, although it was Bernanke himself who did exactly what Krugman now insists: he flooded the markets with liquidity. President Obama isn't spared either: although the Democrats approved a 787 billion dollar stimulus package, Krugman's assessment is scathing - too little, too late, buddies!

His argument is well known. During heavy crisis, the government should provide not billions but trillions. His theory rests upon the primacy of market demand, which should stimulate the economy toward recovery. When the markets become dysfunctional and everyone is thinking about saving money (despite the low interest rates and enough liquidity on the markets), it's then when the state is supposed to intervene, supported by the bank of issue. In his mind it's the state programs for stimulating the economy that should create the jobs that are so desperately needed. The austerity programs only shrink economic power, and cause stagnation. The result from them is that fewer tax revenues arrive into the budget, and the share of the social programs, despite them being severely cut and crippled, increases dangerously, and suffocates the remaining economy. Ultimately, cutting the deficit in such difficult times becomes useless, because it costs too dearly in the long run.

Krugman also argues that as soon as the economy is back on its feet and is again strong enough, the bank of issue could afford to raise the interest rates in order to curb any further inflation tendencies. And that is the moment when deficits could begin to be addressed, and cuts to be made, without affecting the unemployment levels too much. But of course we're all still too far from anything resembling such a situation for the time being. Only when the economy is fortified sufficiently and the populace enjoys relative prosperity, cutting debt would make a lot of sense - not now. The problem is, it is then when people tend to care about accumulating debt the least. Such is the human psychology.

Sure, his new book could serve as a guideline only to a certain extent. Granted, the economic factors and relations, the reasons for the various influences and effects are described in a very comprehensive language, as well as the errors that had been made at the time of the creation of the common European currency. On the other hand, let's not forget that his conclusions and recommendations are simply in line with the tradition of classic Keynesianism, and that's hardly a surprise. After all, the reader should decide for themselves whoever they're going to trust - Krugman the Keynesian, who never msises a chance to emphasize on the role of the government at times of crisis, or Ludwig Erhard, who, conversely, argues that wealth and prosperity could never originate from the state, and neither from the money-printing machine that is the central bank, but instead it should be earned entirely through personal means and solely thanks to one's individual skills. And that's a debate that will probably never cease.

Comments

[hardblue.livejournal.com]

. After all, the reader should decide for themselves whoever they're going to trust - Krugman the Keynesian, who never msises a chance to emphasize on the role of the government at times of crisis, or Ludwig Erhard, who, conversely, argues that wealth and prosperity could never originate from the state, and neither from the money-printing machine that is the central bank, but instead it should be earned entirely through personal means and solely thanks to one's individual skills. And that's a debate that will probably never cease.

I am not familiar with Erhard, but I don't see a contradiction in that formulation, and that Krugman would not disagree with the idea that free enterprise should be the primary engine of the economy, but that this is only about the current crisis, and about it being a demand problem.

[abomvubuso.livejournal.com]

Erhard was the architect of Germany's miraculous post-war recovery.

[telemann.livejournal.com]

Great post. Krugman's op-ed piece today is a dire warning about the Euro. Apocalypse Fairly Soon. (http://www.nytimes.com/2012/05/18/opinion/krugman-apocalypse-fairly-soon.html?_r=1&smid=tw-NytimesKrugman&seid=auto)

Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge. This doesn’t have to happen; the euro (or at least most of it) could still be saved. But this will require that European leaders, especially in Germany and at the European Central Bank, start acting very differently from the way they’ve acted these past few years. They need to stop moralizing and deal with reality; they need to stop temporizing and, for once, get ahead of the curve.

I wish I could say that I was optimistic.

The story so far: When the euro came into existence, there was a great wave of optimism in Europe — and that, it turned out, was the worst thing that could have happened. Money poured into Spain and other nations, which were now seen as safe investments; this flood of capital fueled huge housing bubbles and huge trade deficits. Then, with the financial crisis of 2008, the flood dried up, causing severe slumps in the very nations that had boomed before. At that point, Europe’s lack of political union became a severe liability. Florida and Spain both had housing bubbles, but when Florida’s bubble burst, retirees could still count on getting their Social Security and Medicare checks from Washington. Spain receives no comparable support. So the burst bubble turned into a fiscal crisis, too. Europe’s answer has been austerity: savage spending cuts in an attempt to reassure bond markets. Yet as any sensible economist could have told you (and we did, we did), these cuts deepened the depression in Europe’s troubled economies, which both further undermined investor confidence and led to growing political instability.

And now comes the moment of truth.

... see the link for the rest of the op-ed

[jonathankorman.livejournal.com]

That column gives me the Cold Spooky.

[nairiporter.livejournal.com]

Austerity might work only in case there is a real and viable economy, producing real stuff. If there is largely a virtual economy like in Greece's case, austerity would be the final nail in the coffin.

[badlydrawnjeff.livejournal.com]

You'd think the opposite, though - part of why austerity supposedly doesn't work is because the government isn't spending. If there's a "real and viable economy, producing real stuff," it would at least make theoretical sense that austerity would be harmful. If it's a "virtual economy," what are the important things the government needs to be spending more, rather than less, money on? Where's the benefit of government-spending-as-stimulus?

[dwer.livejournal.com]

certainly, Austerity hasn't worked yet, and we know spending will.

[telemann.livejournal.com]

Paul Krugman got it right in 2009. (http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/?pagewanted=all)

Bit by bit we’re getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is lowballing its plans in an attempt to get bipartisan support.

The starting point for this discussion is Okun’s Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun’s Law coefficient range from 2 to 3. I’ll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.

[ . . . ]


And that gets us to politics. This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

[badlydrawnjeff.livejournal.com]

[citation needed]

[jonathankorman.livejournal.com]

Krugman's assessment is scathing - too little, too late, buddies!

In fairness to Krugman, he's not justifying himself with the benefit of hindsight: he said it in public at the time.

[telemann.livejournal.com]

Yeah, he's been very consistent on this too.

[htpcl.livejournal.com]

> The governments should finally start spending,

Wait, when had they stopped?

[jonathankorman.livejournal.com]

Krugman in 2008: (http://www.nytimes.com/2008/12/29/opinion/29krugman.html)

The answer, of course, is that state and local government revenues are plunging along with the economy — and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

[ddstory.livejournal.com]

Good point. I'd have used "spending wisely" if I were him.

[badlydrawnjeff.livejournal.com]

Shh.

[abomvubuso.livejournal.com]

Only when the economy is fortified sufficiently and the populace enjoys relative prosperity, cutting debt would make a lot of sense - not now. The problem is, it is then when people tend to care about accumulating debt the least. Such is the human psychology.

That's the problem, yes. People (including politicians) getting carried away with the prosperity at the time, and forgetting to think in the long term.

And then the next bust follows.

[the-rukh.livejournal.com]

Well if the government is actually running a surplus obviously its being greedy and we need to cut taxes. Nevermind saving,.

[gunslnger.livejournal.com]

Yeah, we're all screwed.

[ddstory.livejournal.com]

The end is nigh! Run to the caves...

[luvdovz.livejournal.com]

Well, that sure was extremely intelligent (http://talk-politics.livejournal.com/1453567.html?thread=116363263#t116363263). :P

[rasilio.livejournal.com]

Austerity, Krugman keeps using that term but I don't think it means what he thinks it means.

Somehow Krugman and his ilk have managed to confuse spending increases that are slightly smaller than previous spending increases as "Austerity" but I'm sorry, if you;re living at the Ritz and ordering Room Service every night cutting that Starbucks Latte out of your budget cannot seriously be called "Austerity"

So please someone show me all these so called budget cuts that have happened across the world.

[badlydrawnjeff.livejournal.com]

Here's some raw data (http://www.oecd-ilibrary.org/economics/government-final-consumption-expenditure-in-us-dollars-2012-3_govxp-table-2012-3-en) - not a single nation is below 2007 levels, and only Greece is below 2008, and even then only barely.

[foolsguinea.livejournal.com]

If we are to regain broad prosperity, it's time for the Milton Friedman libertarians to break with the "small-government" tax-cuts crowd, and advocate massive, expensive intervention to rebuild an opportunity economy. But if you advocate the kinds of things Friedman did, you'd be scoffed at. Right or left, each generation of self-righteous ruling class nitwits has to learn things the hard way. And they'll make "the help"--that's us--bear the price.

[frodomyhero.livejournal.com]

Screw all of this, legalize marijuana, tax the shit out of it. Stop using so much money to stop it. Once you've legalized it, the cartels will have to stop too. Or maybe find something else to do. But people can produce it which will make lots of jobs.
Renewable energy. Try using spent cooking oil as fuel. Hell, every town has at least one McDonalds and a Burger King, they should get tanks and filters out back, sell the spent cooking oil ( more jobs) people roll up to get greasy food and spent cooking oil for their cars!

[ddstory.livejournal.com]

You'd need way more than legalizing marijuana (and prostitution, btw). That's just a fraction of the economy.

[mikeyxw.livejournal.com]

Krugman was talking about the US economy only in the piece, not Europe. They are two completely different problems, the US is a competitive economy whose long term prospects look pretty good. We’ve got a growing population and workforce, reasonably competitive companies, and the best universities that will collect talent from all over the world. We have been consuming a bit too much and producing a bit too little over the past decade but I haven’t seen any serious economists come out and say we’re doomed. The debate isn’t so much if spending more will stimulate the economy but rather will spending more now, creating more government debt, slow long term growth more than taking the hit to growth now and emerging with lower debt and higher growth later. Government debt does crowd out private lending and therefore long term growth, and reasonable economists can disagree about the best approach. Spending more now will certainly be good in the next two years, but may be the wrong decision for the next decade.

Greece is a completely different story and will not be saved by further spending. They’re doomed. Not only do they owe almost twice their GDP, they make about 30% more than they should, meaning they really owe over twice what their GDP should be. They also seem unwilling to reduce their incomes to a level that compares with what they produce, so, as long as they can find sources of money, this will just get worse.

The rest of the Euro is having different problems and probably needs a variety of solutions. The French need labor reform, the Germans could certainly do with some spending, and the Irish are probably in for some more austerity... at least they have Guinness to see them through.

[anfalicious.livejournal.com]

Australia went with stimulus rather than austerity; 4.9% unemployment, 3% growth. We were lucky enough to have politicians not so completely sold on Chicago School mumbo jumbo that they actually saved money in the good times (although there were their fair share of irresponsible tax cuts). We could afford to spend our way out of it.