The Fiscal Insanity Of Paul Krugman Or Alternately, Why Paul Krugman Is One Of The Most Contemptible People In Politics


Paul Krugman seems to spend most of his time these days yowling for higher spending EVERYWHERE. If you listen to Krugman, you’d think every economic problem America and Europe have is a result of not spending enough money. Krugman’s thinking is loosely based on Keynesian economic theories that don’t work now and have never worked at any point in the past. The whole idea that the government can make the economy surge by taking tax money out of the economy and spending it is like trying to fill a swimming pool by taking water out of the deep end and pouring it into the swimming pool. It doesn’t make any sense.

Now theoretically, you might be able to get some benefit out of borrowing money and spending it, but in practice, it doesn’t seem to work that way. Moreover, even if it did work, it would turn out to be self-defeating because it presumes you’ll cut spending at some later point and our entire history suggests that doesn’t happen. It’s EXTREMELY EASY to increase spending and EXTRAORDINARILY DIFFICULT to reduce spending; so spending increases tend to be permanent.

There are also other difficulties which we’ll get into after you read Krugman’s comments about Spain.

Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on – and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

In a way, it doesn’t really matter how Spain got to this point – but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate – on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on – and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

In a way, it doesn’t really matter how Spain got to this point – but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate – on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

First of all, it doesn’t really matter WHY Spain has a huge problem paying its bills; the reality is that it does.

Spain Heading for Highest Debt Level in 22 Years

Spain’s debt-to-gross domestic product ratio will soar to 79.8 percent in 2012, below the European average but a big rise from 68.5 percent last year, the budget documents showed.

…Spaniards have been fairly tolerant of his austerity but thousands turned out for a general strike last Thursday in a sign patience may be wearing thin.

“The challenge of this budget is to recover the confidence of our European partners, of European institutions, of investors in Spain,” Montoro said.

…Spain must reduce its deficit to 5.3 percent of GDP this year and to the EU limit of 3 percent of GDP in 2013 from 8.5 percent last year.

Next, keep in mind that when people like Krugman talk about “austerity” they are almost inevitably talking about nations that have large debts and large deficits. Krugman rants about Obama’s “austerity,” and we have 15 trillion dollars in debt and will run a deficit somewhere between 1.2 and 1.5 trillion dollars this year.

Now, setting aside the fact that the course of action Krugman is suggesting has been proven not to actually stimulate the economy, it would be extremely difficult to cut spending afterwards even if it did, and there’s not much real “austerity” going on — there is another huge problem to consider.

Keep in mind that the United States and Western Europe have traditionally been the wealthy nations that loaned OTHER countries money. But, that begs the question: what happens when the international piggy banks start to run out of money? We’re starting to find out because as America and many of the nations in the European Union have been getting progressively deeper in debt, the world market is beginning to develop a shortage of nations and entities that are willing and able to lend us money. So, even if nations wanted to pursue Krugman’s politically motivated — not economically motivated — strategy, we’re only a few years from the point where there’s just enough money in the world. Because there are so many large economies looking to borrow money, the interest rates are going to start soaring, which is a problem because of the enormous amount of debt these nations hold. Increases in the interest rate can cost billions or even hundreds of billions for nations like the United States.

Krugman is not a dumb guy. He has forgotten more about economics than most people know and he’s aware of every one of those problems I’ve just talked about, but he makes no serious attempts to address any of them. Unfortunately, his audience is mainly comprised of liberals who don’t know much about economics. That means he can tell them what they want to hear, which is, “Obama should spend lots more! It’s good for the economy,” without having to worry about his readers seeing all the incredibly obvious flaws in what he’s saying. That’s one of the reasons Krugman is such a despicable person. He actually has a lot of influence and could do a lot of good for the country if he were willing to do the right thing. Instead, he’s looking out for himself instead of his country and he’s doing a lot of damage in the process.

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