Nobel Economics Prize Winner Paul Krugman dismisses Austerity

superluck

https://www.youtube.com/watch?v=EqDnnzY_tU8

“At this point the Germans need to face the reality that this cannot work and that the Irish, who’ve been such good soldiers in this crisis, if even the Irish say no then that would actually send a helpful message,” he said.

Krugman said that austerity is a “deeply destructive policy” which is “failing dismally”. He blamed the vanity of politicians for pursuing a policy which he said is not working.


Since Krugman is a professor of economics, surely he knows what he's talking about.

So how do the Irish feel now they've tightened the noose around their own necks with a yes vote?

paddy0090

Well look you'll find plenty of Phds who disagree with him. He's not a total f*ckoff though and I regularly read his articles. I saw him on Newsnight on wednesday with Ken Rogoff and he seemd really grounded and sympathetic. But it should be rememebered that he's also arguing this from a US perspective. I don't think he realizes how divided the EU is(Europe/ the Eurozone..honestly what do I say here) . It's just not the US.

superluck

I think he does understand the problem with Europe and he has pointed the finger at Germany and the ECB.

“European currency union was a mistake since the day the Maastricht Treaty was signed,”

He has argued that the problems of the eurozone are political.
There's no centralised government of Europe and it's why the Euro can never really work in the long term.

Some investors are warning that unless there's collective responsibility for the debt of each state in the Eurozone, we could witness sovereign defaults within the next 6 to 12 months.

Yes, Ireland incurred huge debts it could not afford but were investors under the impression Germany would support those debts?

Germany have done well from this Eurozone project ...I'd be more inclined to believe they're on the side of breaking up the Euro to save themselves rather than take on debts of other states like Greece, Ireland, Spain, Italy or Portugal.

BTW: Apparently dollars would be safer place to put your money for the next 18 months but maybe this is all just more fear mongering, I'm sure someone can make money from a Euro collapse.

cyberhog

Krugman hits the nail on the head.

...

The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison?

The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.

So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

...

And there’s a clear moral to this story: When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can’t or won’t. By all means, let’s balance our budget once the economy has recovered — but not now. The boom, not the slump, is the right time for austerity.

http://www.nytimes.com/2012/06/01/opinion/krugman-the-austerity-agenda.html?_r=3&ref=opinion

johnnyskeleton

Austerity discourages contemporaneous growth. That's well established. However, that doesn't mean that the inverse is true - that profiligacy creates growth.

More importantly, the policy that we can evade financial downturn by continuous borrowing and spending was followed in 2002. Te belief was that we could have unlimited and everlasting growth. This, of course was wrog and it turns out that the severe depression we are experiencing now was significantly contributed to by the attempt to avoid recession in 2002. You see the short term fix often has adverse long term consequences.

It should also be noted that krugmans policies have been followed in the US and while this has lead to much criticism of the European policy by comparison, Europe is not significantly worse of than the US and, I believe, once the economy has stabilised we can then, and only then, start an expansionary policy which I believe will produce better results.

ressem

And he was on the RTE Saturday business show.
Mentioned that
1. the austerity hawks in the US and UK couldn't care less about the deficit, that when you scratch at their arguments they are more using the situation to break down social protections for idealogical reasons.

2. Irish politicians don't have power to resolve the situation. It must come from the ECB \ Germany.
(So if a yes gets these governments past looking at trying to fix 2006's / 2020's bubble forming problems then I'm happy that maybe they'll stop avoiding the real issue.)

3. The Crisis we have is unemployment and underemployment. Just as it was in America in the '30s, Ireland in the '80s and now.
Money is being dumped into safe havens whether its German banks at 0% to hold money, or the Basel 3 mandated extra reserves.
(Do Politicians and regulators consider that there is a high cost to building up reserves of cash.
Even the credit unions are being forced to horde money (making a loss) on which they'd be collecting 8-10% and still benefiting their community by slamming out moneylenders. )


Give us a project / business that we do not think is a hole digging and filling bondoogle or vote buying exercise and allow people to invest in it.

A share in a toll road or bridge around Galway City maybe (to cut out the 30 minute drives down (the 6 minute walk) College road at peak times).

The infrastructure forum guys would have better suggestions.

Reform the local planning system to prevent reasonable objections and 'requests to adjust' blowing up into false dichotomies of Yes / No.

The small stuff that we can do for ourselves, but our politicians have always just neglected.

Or stuff like... http://www.rte.ie/radio1/thebusiness/emptyspace.html
empty or underused buildings that the landlord are willing to make available to startups.
A friend was trying to get some startup space in Laois for a business that will grow, a queue out the door of foreign customers, went to the enterprise centre in Portlaoise looking for space with 3 phase power and they couldn't even help with a list of available locations.

later12

I really enjoyed his contribution the The Business this morning. He's a very eloquent man, which is a slightly freak but welcome trait in a serious economist.

Anthony16

If we default,there will have to be massive cuts in public spending and an abolition of the croke park deal.
the government are frightened of the uproar it would cause among the incredibly powerful trade union memebrs and thus,they will do their utmost to not cut public spending in spite of the fact that the majority of private sector workers are losing their jobs.
Unfortunately that policy does not win votes.
Most economsts agree that our welfare and public sector spending is ridiculous but nothing will be done unless we default.

Kinski

We should take on board the commentary of people like Krugman, but let's not start treating it like the Voice of God just because he won the Nobel Memorial "Nothing To Do With Nobel" Prize In Economic Sciences.

People might feel he "talks sense," is eloquent, well-presented, or whatever, but he showed a very ugly side of himself recently in a spat with Minskyite Aussie economist Steve Keen. He's making arguments, not preaching Gospel.

Still, makes a change from only ever hearing Cormac McCarthy's, Karl Whelan's, Brain Lucey's or Dan O'****ing Brien's opinions when the media want an "expert" view on economics.

ressem

Anthony16 wrote: »

If we default,there will have to be massive cuts in public spending and an abolition of the croke park deal.
the government are frightened of the uproar it would cause among the incredibly powerful trade union memebrs and thus,they will do their utmost to not cut public spending in spite of the fact that the majority of private sector workers are losing their jobs.
Unfortunately that policy does not win votes.
Most economsts agree that our welfare and public sector spending is ridiculous but nothing will be done unless we default.

I mentioned in another post that Latvia took the harsh route. Because they wanted into the Euro, they didn't devalue the currency.

I'm going to guess at applying the same consequences to Ireland based on their path.
Unemployment jumps to 22% as numbers in the public sector are slashed back.
Private sector demand is hacked back. More mortgages and debt is put into arrears. Banks need more bailouts or breakups and selloffs.
Emigration climbs by what, 30,000 per year as 10 billion less comes into the country annually?
We get GNP growth after a dramatic fall, but the rate of replacing jobs lost is very slow.

So future is better for those with jobs at the end, and those without jobs are crushed further. Is the resulting GNP growth real or a dead cat bounce?

Krugman mentioned in the OP video that when there is growth in the economy, then the deficit should be slashed back but not until there are jobs being created at a decent rate.

Channel Zero

ressem wrote: »

And he was on the RTE Saturday business show.
Mentioned that
1. the austerity hawks in the US and UK couldn't care less about the deficit, that when you scratch at their arguments they are more using the situation to break down social protections for idealogical reasons.

I believe the term for this is 'disaster capitalism'. The crisis being intentionally manipulated to push through extreme free market policies that were otherwise not politically possible. Lowering of corporate and wealth taxes, slashing public services and wages, undermining workers rights, radical privatisations.
It seems like the tactics of Thatcher/Fisher and Reagan/Niskaken all over again.

later12

Kinski wrote: »

We should take on board the commentary of people like Krugman, but let's not start treating it like the Voice of God just because he won the Nobel Memorial "Nothing To Do With Nobel" Prize In Economic Sciences.

People might feel he "talks sense," is eloquent, well-presented, or whatever, but he showed a very ugly side of himself recently in a spat with Minskyite Aussie economist Steve Keen. He's making arguments, not preaching Gospel.

Well apart from the latter point, that was something Krugman dealt with in his The Business interview on Radio 1 this morning. He said that there is far too many emotive or arbitrary theories in macroeconomics that seek to dismiss 80 years of emprirical and well founded standard macroeconomic research. These fairly baseless theories are often based on what he termed "Very Important People".

I don't think anyone should be looking to Krugman as some sort of Zeus, no more than any other celebrity economist. But I certainly would support his call for a return to a more serious, considered and evidence based approach to macroeconomic discourse.

Anthony16

Where are new jobs/growth going to come from?
Private enterprise.
we have a 15 billion deficit each year at the minute.
Cutting public sector wages by 33% would halve that.
A default looks an inevitability as there is no way we will pay back those loans while the public sector unions run the country.

20Cent

Saw Krugman on Newsnight and he was excellent. His point wasn't against austerity per se, he was referring to austerity during a depression. During boom times he said he'd be a fiscal hawk and all for cutting. The number one problem businesses have is not "red Tape" or tax its a lack of demand. Without demand or money moving in the system there is nothing that can be done to bring the economy back. One persons purchase is anothers wage, if everyone stops spending it harms everyone else and creates a downward spiral which is what we are seeing in Europe now.
He destroyed the two tory shills that were on the show who are all for austerity not because of the deficit but for ideological reasons. Cut all you like but it still won't give the economy the necessary boost it requires to grow again, just makes things worse actually.

SupaNova

The eurozone in aggregate has lower debt to gdp than the UK, US or Japan. Also for the last few years the eurozone as a whole has taken on less new debt each year than those three. And the Eurozone as a whole has very balanced trade with the rest of the world where as the US has been continuously running large trade deficits. I guess Krugman is basing his conclusion that austerity isn't working in Europe based on crude gdp growth measurements, and ignoring everything else.

sharper

20Cent wrote: »

Saw Krugman on Newsnight and he was excellent. His point wasn't against austerity per se, he was referring to austerity during a depression. During boom times he said he'd be a fiscal hawk and all for cutting.

That's strange. I don't remember seeing Mr Krugman on Newsnight between 2000 and 2007 pointing out Ireland or others should be cutting their government spending.

As for the "demand" argument: Demand for what exactly? If Ireland borrows money, pays it to out to people via PS wages and those people then buy an iPad or go on a foreign holiday then the "demand" is stimulated elsewhere.

What does Ireland produce that needs more demand and for which that demand can be stimulated by the Irish government?

Dannyboy83

Some interesting points.

I do think the crisis is no longer as insurmountable as it once seemed, in particular for Ireland, now that it looks like we have a source of cheap loans for a long time to come.

It seems the idea of the Irish government is to continue to receive cheap loans through the ESM, and just survive until the rest of the world eventually recovers.
But of course our deficit will have to be at last halved in order to comply with the new regulations. I think the requirement is 3% of GDP???


I suppose Krugmans theory could still be applied here, but for all intents and purposes, a tax is no different to a cut, in his framework at least.

If instead of closing that deficit through austerity, the idea is to try to close it through growth, then I don't see how the core function of austerity could can be ignored or is actually altered in any way.

You need money for Capital spending in order to enable growth.
We don't have any money lying around unused, it was used as part of Bailout I.
And obviously, we cannot borrow it from a third party.....unless we went back to the bond markets for some very expensive loans to be used to bolster capital spending while continuing to receive ECB bailouts????
That would be a risky strategy given that there is no guarantee of growth.

The only obvious answer is to rearrange how the money we DO have is being spent.
Too much money is diverted to some areas such as Social Welfare and Public Sector Pay and Pensions, and too little is diverted to Capital Spending.

Altering this requires scrapping the Croke Park Agreement and making 'the difficult decisions'.
That still leaves us in the same quagmire.
Net change: Nil.

RoverZT

Anthony16 wrote: »

Where are new jobs/growth going to come from?
Private enterprise.
we have a 15 billion deficit each year at the minute.
Cutting public sector wages by 33% would halve that.
A default looks an inevitability as there is no way we will pay back those loans while the public sector unions run the country.

Almost every country has a deficit ever year.

167 Ireland -3.191
2010 Australia -30.400 2010 Canada -52.600 2011 Spain -60.900 2011 India -62.960 2011 Brazil -63.470 2011 United Kingdom -66.600 2011 France -77.878 2011 Italy -74.300 2011 United States -599.900 2011

See any big names there ?

Were all ****ed.

ardmacha

we have a 15 billion deficit each year at the minute.
Cutting public sector wages by 33% would halve that.

It would do nothing of the sort. 60% of the cut would immediately be lost in income taxes, levies and the like, you'd reduce 15 billion by one sixth. Why do people keep posting this type of simplistic nonsense over 3 years into this recession?

Now one third off welfare would make an impact.