February 20, 2012

Krugman tells half a story

The Krugman answer.
Paul Krugman, economist, propagandist, and Keynesian ideologue looks to Europe and sees a failure of countries' attempts at austerity in helping their economies - as if the problem was one that could be solved overnight.  The same liberal logic used to defend president Obama - the recovery will take time - doesn't get applied when Krugman looks at the success or failure of solutions that don't fit his world view.
Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.

Furthermore, bond markets keep refusing to cooperate. Even austerity’s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better.
(emphasis added)

The interesting point is that austerity measures don't produce results overnight, just as president Obama said there were scores of shovel-ready projects that would lift the country out of recession almost immediately turned out to be pure fantasy, it is fantasy to suggest that austerity, during a downturn would provide nothing but roses is a false claim.  Nobody suggested it would.

As for the lessons of history, in the early 1980s the deep economic recession under Reagan was deepened by the high interest rate policy which was designed to deepen the pain but significantly shorten the period of pain.  Krugman has not learned the real lessons of history - that long term solutions are not the best short term solutions.  Looking at the austerity measures taken in Europe in countries that had previously been on unsustainable paths, the long term is set up far better than additional stimulus efforts would have provided.  The point is - the results are not in this has just started.  True, it's painful, that's what happens withdrawal symptoms of an addiction.  But give it 10 years and you'll see an entirely different set of circumstances.  

The sad part of the proof will be this - if Krugman gets his way and Obama gets re-elected, the matter of proving the effectiveness of austerity measures will be easier because the United States will become the control group for the European austerity experiment. Spendthrift American government will end up being the cautionary tale Austrian school economists teach to a new generation of European economic students.


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