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Krugman – (Not) Learning From Greece

We don’t usually post editorials here, but this effort latest from the resident ‘economist’ of the New York Times is just too (Frank) rich to pass up:

Learning From Greece

By PAUL KRUGMAN

April 8, 2010

The debt crisis in Greece is approaching the point of no return. As prospects for a rescue plan seem to be fading, largely thanks to German obduracy, nervous investors have driven interest rates on Greek government bonds sky-high, sharply raising the country’s borrowing costs. This will push Greece even deeper into debt, further undermining confidence. At this point it’s hard to see how the nation can escape from this death spiral into default.

It’s a terrible story, and clearly an object lesson for the rest of us. But an object lesson in what, exactly?

Yes, Greece is paying the price for past fiscal irresponsibility. Yet that’s by no means the whole story. The Greek tragedy also illustrates the extreme danger posed by a deflationary monetary policy. And that’s a lesson one hopes American policy makers will take to heart.

Yes, indeed. It’s our “deflationary monetary policy” that will be our un-doing. Not fiscal irresponsibility.

The key thing to understand about Greece’s predicament is that it’s not just a matter of excessive debt. Greece’s public debt, at 113 percent of G.D.P., is indeed high, but other countries have dealt with similar levels of debt without crisis. For example, in 1946, the United States, having just emerged from World War II, had federal debt equal to 122 percent of G.D.P.

Our WWII debt is being cited now more than Adolf Hitler. But isn’t it telling that such economic Solons like Mr. Krugman have to go back to the worst time in the nation’s history to find a comparable situation?

We weren’t force at the point of a gun into the situation where we find ourselves now. That wasn’t quite the case back in WWII.

Yet investors were relaxed, and rightly so: Over the next decade the ratio of U.S. debt to G.D.P. was cut nearly in half, easing any concerns people might have had about our ability to pay what we owed.

Could that possibly be because the United States was the only major nation on earth whose industrial base was not completely devastated by the war? We had a world that was desperately in need of our products, and literally no significant competition.

Does Mr. Krugman think that we in similar circumstances today? Does he think Greece is?

And debt as a percentage of G.D.P. continued to fall in the decades that followed, hitting a low of 33 percent in 1981.

So how did the U.S. government manage to pay off its wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade. The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.

Gosh, we grew our way out of debt. How brilliant of Mr. Krugman to see this! No wonder, like his idol Mr. Obama, he is also a Nobel Laureate.

Unfortunately, Greece can’t expect a similar performance. Why? Because of the euro.

It truly is to laugh.

You see, if it weren’t for the Euro Greece would just revert to its usual position as an economic powerhouse and start exporting its Ouzo at such a rate it would grow by leaps and bounds, just like the US did when it bestrode the world as a colossus after WWII.

Until recently, being a member of the euro zone seemed like a good thing for Greece, bringing with it cheap loans and large inflows of capital. But those capital inflows also led to inflation — and when the music stopped, Greece found itself with costs and prices way out of line with Europe’s big economies. Over time, Greek prices will have to come back down. And that means that unlike postwar America, which inflated away part of its debt, Greece will see its debt burden worsened by deflation.

Oh, America inflated its way out of debt. It didn’t grow it’s way out of debt.

Our mistake.

But gosh, it sure is insightful to point out that if Greece’s currency gets deflated it will make it that much harder to pay back its debts.

Again, that’s the kind of profound analysis that gets you a Nobel Prize for economics.

That’s not all. Deflation is a painful process, which invariably takes a toll on growth and employment. So Greece won’t grow its way out of debt. On the contrary, it will have to deal with its debt in the face of an economy that’s stagnant at best.

So the only way Greece could tame its debt problem would be with savage spending cuts and tax increases, measures that would themselves worsen the unemployment rate.

Oddly enough, cutting government spending often leads to an expanded economy and more jobs back here on planet Earth. But in Mr. Krugman’s world that is just as damaging as raising taxes. Actually, far worse.

No wonder, then, that bond markets are losing confidence, and pushing the situation to the brink.

What can be done? The hope was that other European countries would strike a deal, guaranteeing Greek debt in return for a commitment to harsh fiscal austerity. That might have worked. But without German support, such a deal won’t happen.

Greece could alleviate some of its problems by leaving the euro, and devaluing.

Didn’t Mr. Krugman just say five paragraphs earlier that devaluation would “worsen” Greece’s “debt burden”?

But it’s hard to see how Greece could do that without triggering a catastrophic run on its banking system. Indeed, worried depositors have already begun pulling cash out of Greek banks. There are no good answers here — actually, no nonterrible answers.

But what are the lessons for America? Of course, we should be fiscally responsible.

“Of course?” When has Mr. Krugman ever suggested such a thing before?

How can fiscal responsibility and ‘social justice,’ and more specifically ‘economic justice’ co-exist in the same room?

What that means, however, is taking on the big long-term issues, above all health costs — not grandstanding and penny-pinching over short-term spending to help a distressed economy.

Whew. We were worried that Mr. Krugman was facing a conundrum. But luckily ‘fiscal responsibility’ is different from opposing a trillions in stimulus spending and a (two) trillion dollar unnecessary healthcare reform bill.

That is “penny pinching.”

Equally important, however, we need to steer clear of deflation, or even excessively low inflation. Unlike Greece, we’re not stuck with someone else’s currency. But as Japan has demonstrated, even countries with their own currencies can get stuck in a deflationary trap.

Ah, so this is the wonderful lesson we are to take from the Greek tragedy. Ramp up inflation!

That will solve all of our problems. We can have guns and butter and free healthcare, if we just don’t worry about inflation going through the roof.

After all, when has that ever been a problem for any country in the history of the world? Look how well it worked out for the Weimar Republic and, more recently, Zimbabwe.

What worries me most about the U.S. situation right now is the rising clamor from inflation hawks, who want the Fed to raise rates (and the federal government to pull back from stimulus) even though employment has barely started to recover. If they get their way, they’ll perpetuate mass unemployment. But that’s not all. America’s public debt will be manageable if we eventually return to vigorous growth and moderate inflation. But if the tight-money people prevail, that won’t happen — and all bets will be off.

Why isn’t Mr. Krugman a czar? He obviously has all of the answers.

– And a Nobel Prize!

This article was posted by Steve on Friday, April 9th, 2010. Comments are currently closed.

8 Responses to “Krugman – (Not) Learning From Greece”

  1. Right of the People says:

    It’s hard to believe his degrees are in economics. He’s much better suited for the life of a journalist were facts are an inconvenience at best.

    With both him and Barry winning Nobel Prizes, it doesn’t say much for the award, does it?

  2. proreason says:

    Mr. Krugman is the fruit of the success of capitalism which reached its greatest power in the United States about 2006.

    200 years ago, little Paulie would have been a nerd academic and or a scientist living with other nerds males, and would have made a modest living and probably contributed to humanity’s body of knowledge.

    But like all academics and many scientists, he long ago lost his pretty head to the allure of gazillions as they watched movie stars, and baseball players, and news readers, and dirty finger-nailed businessmen, and computer geeks, and gasp even Negro race hustlers, amass fortunes that would make Lousi XIV’s head spin.

    And they want if for themselves.

    Many people who would otherwise be real scientists realized they could make fortunes by being the toadies of mobster politicians like Al Toad.

    Mr Krugman realized he could make his fortune by being the house negro academic for the George Soros’s of the world.

    So don’t go thinking he actually believes what he writes.

  3. U NO HOO says:

    My, uh, economic education is summed up as follows, neither a borrower nor a lender be.

    The corollary, don’t bite off more than you can chew.

    Obama fought the law of supply and demand and the law won.

  4. Reality Bytes says:

    Krugman?! A true master of the “I know you are but what am I” defense. Obviously the man suffers from AODS Adolesent Oxygen Deprivation Sydrome – usually caused by too many hours locked up in your own gym locker.

    • JohnMG says:

      …..”man suffers from AODS Adolesent Oxygen Deprivation Sydrome…..”

      Uhh…..I rather believe he suffers from IDKS…….the I Don’t Know S^#t Syndrome.

  5. JohnMG says:

    Why isn’t Mr. Krugman a czar? He obviously has all of the answers.

    – And a Nobel Prize!

    If he only had a brain………

    I like this one too, U NO HOO; “Don’t let your alligator mouth write a check your hummingbird ass can’t cash.” Krugman should take heed.


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