Paul Krugman: The austerity delusion

http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

by jhnpckr • 11 years ago

86 93 11 years ago

jpfr• 11 years ago

What about Japan? They tried to buy economic growth (dubbed Abenomics) and failed horribly. The economy is worse and government debt is higher than ever.

Models that can't explain some weird edge cases are ok. But what happened in Japan is the exact opposite of what Mr. Krugman tries to convince people.

forgottenpass• 11 years ago

You might have better luck answering your question by googling "krugman japan" than asking outloud on social media.

I know he's talked about his take on Japan a fair bit over the years and I generally ignore economist blogs in the first place.

Amezarak10• 11 years ago

Krugman has written a lot about Japan, and Abenomics. According to Krugman's own analysis, Abenomics would not be very effectual and warned that particular Abenomics policies (like the tax increases) would indeed worsen the economy. It's a little disingenuous to say the economy is worse: growth did improve (until the VAT increase Krugman warned would be disastrous) and unemployment did fall, and Krugman wasn't worried about the debt in the first place since the Japanese can still borrow at very low rates.

Abenomics does not correspond almost at all to Krugman's prescriptions, it was simply expected to be slightly less bad than what was happening before.

adventured3• 11 years ago

To get that growth, Japan massively debased the Yen, chopping down the Japanese standard of living and reduced the real value of all of that debt Japanese citizens are expecting to be paid back by the government.

If you have to significantly harm your currency to get growth, what you're getting is not actual growth, merely an illusion.

mdemare6• 11 years ago

Japan's economy is growing, albeit slowly.

elchief• 11 years ago

Looks like BoE Governor Carney is anti-austerity. I wonder how his meetings with Mr. Cameron go.

http://www.theguardian.com/business/2015/jan/28/bank-england...

nawitus• 11 years ago

Related article: "A jobs miracle is happening in Britain, thanks to tax cuts. Why don't the Tories say so?"

http://www.spectator.co.uk/features/9475222/the-coalitions-j...

youngtaff2• 11 years ago

Unfortunately that article doesn't really explore how much these people who are part of the jobs miracle are being paid!

pluckytree• 11 years ago

If all you care about is the short-term, then forget about austerity. Juice things up a bit. Throw some borrowed money at it. Alleviate some economic misery. But long-term, living within your means leads to greater stability, a market where prices reflect reality, and people that save are rewarded. This is a far greater payoff in exchange for some potential short-term pain.

The worst part is that many governments claiming “austerity” are just playing accounting tricks and not really moving towards solvency. The solution for having spent too much and distoring the economy is not to continue to do the same.

We’ll never know who is right, though. Most of the world has been following the recommendations of this “economist” for decades. Maybe only indirectly because I’m not sure how many people pay attention to him. Spending massively is popular with the public because they get all the benefits, but will be 6 feet under when the bill comes due.

Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea. This guy is the same type of person that thinks that companies carrying a lot of debt is a good idea. The sign of a healthy business. Bunk.

jhugg• 11 years ago

The proper time for austerity is when things are good. When things are bad, juice it up, especially if you can borrow at rates that are negative when inflation adjusted.

The problem with austerity now to make the long term better is that it's not a zero sum game. Austerity lowers GDP growth, which can offset any move toward solvency. You spend less and surprise, you also take in less. Eventually you recover, but poorer than if you had juiced things a bit and no less in debt.

dageshi• 11 years ago

Had the government in the UK run a surplus prior to the financial crisis I suspect the case for a larger Keynesian response from the UK public would have been better received. That is afterall what Keynes originally proposed. Modern Keynesians have disproved it's necessity and yet... public opinion ultimately drives policy, perhaps Keynes requirement of running a surplus in the good times in order to run a deficit in the bad was more about satisfying the psychology of the general public than anything else.

pbreit2• 11 years ago

Austerity in good times? Good luck with that!

dragonwriter2• 11 years ago

The proper time for austerity is when things are good.

Arguably, government fiscal restraint in strong economic times isn't "austerity" in any meaningful sense, but I'd agree that that countercyclical approach is right -- you want the government spending less (as a share of GDP) when the private sector economy is strong, and more when it is weak.

Mikeb854• 11 years ago

Think about it from a business perspective. What makes you more money? Cutting costs, or increasing revenues?

And what is a more sustainable practice to increase revenues: price gouging, or increasing volume/sales?

Now replace these business terms with economic terms. Cutting costs = austerity. Price gouging = raising taxes.

What you want is more people working, more people paying taxes, but keeping taxes at a low enough rate that people still benefit from working, increasing productivity, and keeping their money in the country. It's a maximization curve...

The main problem with austerity is that often the first thing to get slashed is government labour and infrastructure projects, which drastically cuts the size of the workforce, and immediately reduces the amount of taxes coming in, leading to a tax raise, capital flight, and the downward spiral that all economists warn about.

Just like in business there's a certain rate at which loans make sense and a certain rate where they don't. As long as the cost of the loan is less than the interest you'll receive from your investment on said loan (and inflation helps reduce the cost of the loan), you may as well borrow.

"Austerity" in most cases is just a way for predatory lenders to ensure quicker payment, it's by far the worst economic policy.

JonFish85• 11 years ago

"Think about it from a business perspective. What makes you more money? Cutting costs, or increasing revenues? And what is a more sustainable practice to increase revenues: price gouging, or increasing volume?"

That assumes you want to run the country/government like a business. I think that's a fairly large assumption.

aaronbrethorst• 11 years ago

Given the authoritative way in which you say:

    [L]iving within your means leads to greater stability,
    a market where prices reflect reality, and people that
    save are rewarded.

I'm guessing you can back this up with a few modern examples of where austerity programs have been successful, right?

ancap6• 11 years ago

How about in the U.S. in the past couple years[1]?

[1] http://www.forbes.com/sites/johngoodman/2015/01/13/voodoo-ec...

ebbv• 11 years ago

Most of the world has been following the recommendations of this “economist” for decades.

He's a Nobel Prize winner. You putting economist in quotes only reflects poorly on yourself.

Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea.

He's not advising borrowing money you can't pay back. US, UK and other major economies absolutely can pay back the money they borrow. It's a ridiculous scare tactic that the far right has been pushing for the past 20 years to say that we are so far in debt we can never pay it back. That premise is only true if you adopt the ridiculous far right policy of lowering taxes to basically nothing on large corporations and ultra wealthy individuals.

Nimitz145• 11 years ago

Most of the world has been following the recommendations of this “economist” for decades

That's exactly what they have not been doing.

Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea. This guy is the same type of person that thinks that companies carrying a lot of debt is a good idea. The sign of a healthy business. Bunk.

Extremely relevant.

https://alvaroaltamirano.files.wordpress.com/2010/05/krugman...

HN may know programming but holy shit you're on the same level as the worst subs on reddit when it comes to economics and finance.

Amezarak10• 11 years ago

We’ll never know who is right, though. Most of the world has been following the recommendations of this “economist” for decades.

No, they haven't. No country has passed the kind of budget-busting stimulus packages Krugman has said was necessary. The closest any country came was the US, which passed a stimulus package less than half the size of his recommendations and that consisted largely of tax breaks instead of spending increases.

Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea. This guy is the same type of person that thinks that companies carrying a lot of debt is a good idea

No, he isn't. Unless those companies owe debt in currencies they control.

I've noticed there's a bizarre phenomenon surrounding Krugman where people just refuse to read what he says and instead put all kinds of nonsense into his mouth. It happens to all public figures to some extent, but it just seems really next-level with Krugman (and these particular claims are pretty tame compared with the wild accusations you often see.)

Mikeb854• 11 years ago

I've noticed there's a bizarre phenomenon surrounding Krugman where people just refuse to read what he says and instead put all kinds of nonsense into his mouth.

It's because he writes like a Nobel award winning economist. Meaning a dry writing style, and advanced concepts.

Most people hated economics in school (either because they don't understand it, or found it boring - it's basically math that most people see no practical outcomes for) or just strait up don't get it.

copsarebastards• 11 years ago

I agree that in the long term austerity is necessary.

However, austerity as it’s used in politics[1] is little more than a talking point. The Republicans run on the austerity platform and yet Republicans increase deficits more than Democrats. The US deficit is caused largely by military spending and corporate welfare, and the Republican party refuses to cut military spending (unless it’s to helping veterans). The Democrats also increase deficits, but at least they don’t do so while running on an austerity platform.

The few politicians who I would actually trust to be economically responsible are completely socially irresponsible.

The fact is, whether or not austerity is the right way to go is completely irrelevant to how austerity is actually used in politics. So whether or not austerity is the right way to go is a moot point.

[1] In the US—I don’t know enough about international economics to talk intelligently about them.

dragonwriter2• 11 years ago

Most of the world has been following the recommendations of this “economist” for decades.

Er, no, most of the world has not been following Krugman's advice for decades. In fact, pretty much none of it has.

mpweiher2• 11 years ago

And the economies that have followed closer have overall done better than the ones that didn't. Go figure. I mean, we now have the actual evidence.

jstalin• 11 years ago

I'm sure the Greeks would be delighted to hear that more debt spending is the shot in the arm they've been looking for.

cjensen• 11 years ago

He specifically calls out Greece as a special case. His comments are directed towards economies which are not like Greece.

pjkundert• 11 years ago

Ah. The trusty "No True Scottsman" fallacy...

mpweiher2• 11 years ago

Well, Greece has done austerity. And now their debt is higher than before. You don't do austerity in the middle of a depression.

nostromo• 11 years ago

Interest rates are 0% and our economy isn't growing (Q1 '15). I find that scary.

I'm seeing the results of Krugman's philosophy on the ground: Asset prices are way up. Housing in my city is almost as expensive as it was before the '08 crash. For those of us that are lucky enough to own stocks and a house -- three cheers for Krugman, 0% interest rates, and QE!

But the asset economy is outpacing the real economy. Wages are not up. Working age labor force participation is down. Q1 GDP was flat. If you're a working person in the U.S. right now, you're not thriving.

And to me this is a sign that Keynesianism is perhaps played out. We're increasing asset prices, making housing more expensive and increasing inequality, without actually growing the economy.

adventured3• 11 years ago

The 40 to 50 year global experiment in Keynesianism has been a complete disaster. The greater extent a country has put it to work, the bigger the disaster.

All it has done, is give governments an excuse to drastically spend beyond their means to fake growth and well being that isn't real. Then they act so shocked when their economies sink into recession the moment the stimulus programs stop. The US, Europe, China, Japan are all drowning in this fraud, with $60-$80 trillion in new debt over the Keynesian reign, and absolutely nothing to show for it but economic strangulation and upset voters.

douglasisshiny2• 11 years ago

Q1 '15 is being considered a blip for many reasons (weather, west coast port strike, the strong dollar [1], big hits in the energy markets and markets affected by energy, etc.). Many economists expect a bounce back, much like last year.

1. Remember when people, counter to what Krugman said, said the dollar was going to experience hyperinflation?

anm892• 11 years ago

Paul Krugman in 2002: "To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Somehow every op-ed this guy writes gets treated as the word of god. It is important to remember that while he does have a Nobel prize, he has also said a lot of profoundly dumb stuff.

I am not saying that Austerity is inherently good or inherently bad. The truth, like for everything else, lies in the grey and is situation dependent. Krugman however is absolutely religious about fiscal stimulus and demand side economics, and is going to claim that the solution to EVERY problem is increased government spending.

These situations are nuanced and unfortunately what you are hearing from Krugman is something more akin to proselytizing his religous views on the graces of Government spending(a view which no facts or events would every sway him from) opposed to thinking critically about a difficult problem.

mudil2• 11 years ago

Not god. Just former Enron adviser Paul Krugman.

MaysonL2• 11 years ago

So what? See: http://www.pkarchive.org/personal/EnronFAQ.html

Amezarak10• 11 years ago

Let's see what Krugman says about this:

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.
Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the...

Aside from that, Krugman does not, in fact, prescribe increasing the government's share of economic growth in all circumstances, so you're wrong anyway.

mikeash2• 11 years ago

I read the editorial that the "housing bubble" quote is from and it doesn't sound at all like he actually recommends it:

http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip...

The theme of that article seems to be, "we're screwed, and here's why." In that context, the quote in question seems to be saying, "the only way out would be to create a housing bubble, that's how screwed we are."

I think it's ironic to complain about "treated as the word of god" in a comments section absolutely flooded with criticism of him.

I wish we could discuss the ideas rather than the author, in any case.

anm892• 11 years ago

These are after the fact justifications.

He does indeed say that lowering rates to inflate asset prices would be our easiest way out of the situation.

He goes back only to say that it is unlikely that we will cut rates enough so it porbably won't work (ie this will fail because our attempt to create bubbles will be too half assed to work.)

He's pretty clearly serious that lowering rates to encourage investment is our ticket out of the problem.

trhway• 11 years ago

the main problem with "austerity" isn't the theoretical question of the spending levels, it is the political&social issue that practical "austerity" means that during bad times poor people must pay for the well connected and rich people's exuberance of the good times. "Sorry, we have to reduce your pensions and salaries to pay back the loans we spent on our luxury BMWs."

jhulla7• 11 years ago

What Krugman and his ilk fail to address is capital misallocation. Placing capital into its most productive use is the definition of a well functioning market.

We tolerate market distortion for greater social good: safety regulations, environmental regulation, labor laws, etc.

Unfortunately, with QE1,2,twist,3 and ZIRP, we are now well past properly functioning capital markets.

At a gross scale, every single investment in the world now is actually a bet on central bankers keeping interest rates suppressed, liquidity flowing, and money printers running.

The trillions of dollars of distortion that capital markets have experienced since 2008 has fundamentally altered the investment landscape. And not for the better.

Krugman crowing about austerity is laughable. Of course, government spending is just another form of capital distortion. Sure, try some more. It'll be another drop in the bucket. It will not move the needle in a sustainable fashion.

Global demand is being vacuumed up by economies through competitive currency devaluation. Deficit spending (Krugman's argument) generates new demand in the hopes of creating jobs and nurturing the economy.

Unfortunately, since 2008, our global financial system is so radically distorted that a burst of demand isn't about to lift anybody out of long-term economic doldrums.

At the root of the problem is massive capital misallocation that has been baked in the cake. Global supply is so large due to QE and ZIRP that economies worldwide cannot support their investments.

Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess.

Krugman doesn't get it.

Amezarak10• 11 years ago

Instead of market forces washing out the misallocated capital, we've entered into a global extend-and-pretend scheme. How and when this ends is anyone's guess.

So while Krugman offers data and concrete, falsifiable predictions that generally prove correct - for example, that hyperinflation will not be a problem, that QE won't move the economic needle much (but is better than nothing), that interest rates will remain low for the foreseeable future despite claims to the contrary, you offer vague handwaving about capital misallocation and "distortions" and then tell us you can't answer how and when Krugman will actually be wrong.

Can you understand why people have difficulty coming to terms with your beliefs? To me it just seems rooted in some cognitive bias about suffering and sacrifice; it sounds like you just can't believe things are this easy, that we have to suffer and be punished for our vile profligacy.

jhulla7• 11 years ago

First, the market is made up of all of us seeing similar data and coming to our own conclusions based on our interpretations and self-interest.

Second, the market didn't just crash in 2008, it melted down. There were fears of simultaneous runs on global banks with catastrophic consequences. Bernanke/Geithner/Paulson orchestrated government backstops on money market funds, on Fannie/Freddie debt, on shotgun-marriages between banks, on defusing the credit default swap nightmare constructed by AIG and its counter parties. ZIRP and QE were brought in to juice spirits in the hopes of rescuing growth.

2008-2009 was the end of the financial world as we knew it going back to Paul Volcker. It was nightmare. It was a catastrophic end that many and been predicting for some time. Some saw the writing on the wall by 2005 and were positioning their investments accordingly. Read about the thoughts of Ray Dalio, Stan Druckenmiller, or Jeremy Grantham.

Since 2008-2009, we're now in a whole new regime. Perpetual QE + ZIRP is not in ur economic textbooks and I do not believe our models can tell us what is coming.

We had an opportunity when things were stable in 2010 to find a sustainable path forward. Instead, worldwide, we've just taken regular hits of QE.

vasilipupkin• 11 years ago

this point is valid, conditional on the assumption that current GDP level is fixed. Then, govt spending is just money that is taken away from private sector. The point though is that, under certain conditions, govt spending can raise the level of GDP. Those conditions, specifically, refers to times when private sector for reasons of essentially, risk aversion, is under investing. I am not saying that Krugman is 100% correct, but he is describing a valid state of the world, and it is you who doesn't get it :) Now, there are other cases when even under normal conditions increase govt spending, for example, to finance basic research, can raise GDP

jhulla7• 11 years ago

I actually agree that government spending can boost GDP. Where Krugman doesn't get it is that we've already distorted markets so much since 2008-2009 that a burst of government generated demand will not move the needle in a sustainable fashion. A $1 trillion government program will just get drained into rising asset prices - leaving incomes and the majority of individuals in largely the same spot as they started financially.

Krugman is fighting an old war.

Our current economy is not encumbered by too little demand - but by too much supply from past capital misallocation.

Our addiction to QE has made problem far worse. Asset markets are exploding in price higher due to central bank intervention while incomes are not.

mytoaster• 11 years ago

Here are some numbers: the core of the massive distortion is in govt debt. This was in Fall of 2014 where half of govt debt yields less than 1%, it's actually gotten worse since.

http://www.bloomberg.com/news/articles/2014-09-04/almost-hal...

Negative(?!) yield 10-years.

http://www.reuters.com/article/2015/04/08/swiss-treasury-idU...

Anyone would be hard-pressed to say that this is a well functioning market.

AJ007• 11 years ago

Or is he just a good liar? There are big negative consequences irregardless of what path is taken, voluntarily or otherwise -- but certain choices allow others time to run for cover. Perhaps he believes what he is saying, but absolutely individuals with self-serving intentions benefit by repeating it: corporations, government, and ultra-wealthy.

If the problem is a shortage of money, then the future is full of things that are built with borrowed money: roads, cars, bridges, power plants, factories, chain retail stores, restaurants, suburban sprawl, hotels, and high rise apartment/condo/office buildings. These guys imagine taking the last 50 years and plotting financed growth indefinitely in to the future. There is not much imagination in a nation plastered from one border to another with McDonalds and cookie cutter communities, but what is financed must have past blueprints to provide mathematical models behind the loan.

If an economy must have continuously increasing prices to succeed, then Krugman is right. In tech, I think we would be fucked if we had to pay more money for less every year. That is what Krugman wants. (What I've observed tends to happen is prices of what is financed speed up vs what is not financed, like wages.)

The thing that stuck out to me in 2007 was how low yields were for very unattractive debt. It has happened again. Watch out.

mudil2• 11 years ago

The big Keynesian idea is that somehow gov't can allocate capital better than private businesses. But that patently cannot be true. (I never could understand how Keynesian economics is different from socialism.)

Mikeb854• 11 years ago

Not true whatsoever.

Here's the definition as stated by Wikipedia, which I find to be pretty accurate and concise:

Keynesian economics is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy).

This contrasts with the earlier theory that production creates demand.

And while Keynesian economics does suggest that the government should intervene in the economy, it's far from a command economy.

bitL• 11 years ago

The problem with austerity as I see it is that it is a losing strategy if any other player doesn't adhere to it. Example - Economy A starts QE, Economy B sticks to austerity. Economy A gets super cheap money they have to invest somewhere, Economy B is short on money due to austerity. Economy A with the money out of thin air buys most of the industrial assets of Economy B. Economy B wants to change the course by rejecting austerity and starting QE. But the first mover advantage is gone, Economy A's stocks are already inflated so Economy B can't gain anything by trying to do the same as Economy A, buying Economy A's industrial assets, causing downfall of its trading currency.

pbreit2• 11 years ago

Pretty much every government could benefit immensely from austerity. The problem is, of course, that government is lousy at execution and overly political and self-preservation all and so, for example, cuts the most visible programs first.

Yes, I understand the notion of spending your way out of a recession.

seertaak• 11 years ago

The Paul Krugman delusion: thinking a little or a lot more of the policies that have produced little to no improvement will suddenly work if we do it just one more time.

mdemare6• 11 years ago

Actually, The Paul Krugman delusion is the illusion that people have that they have much more insight in economics and economic policy than Paul Krugman, despite never having studied economics, or read a textbook or a journal in economics.

quadrangle• 11 years ago

That's really just an instance of the Dunning-Kruger effect, but it's a good example of it.

thoward3• 11 years ago

Krugman presents this as a dilemma between two choices.

1. Institute austerity now. 2. Institute stimulus now, pay down debt responsibly once the good times roll.

This is a sham dilemma. The real options appear to be.

1. Institute austerity now. 2. Institute stimulus now, but half-ass the debt paydown in the future, condemning future generations to a high debt to GDP ratio.

Given this real dilemma, which is worse? I don't pretend to know the answer. I know austerity sucks. I also know that governments lack the self discipline to pay down debt significantly in the future.

Which option is actually worse?

Amezarak10• 11 years ago

Given this real dilemma, which is worse? I don't pretend to know the answer. I know austerity sucks. I also know that governments lack the self discipline to pay down debt significantly in the future.

What real-world problems do high debt/GDP ratios cause?

Isn't the whole point of stimulus to kick-start the denominator in the debt/GDP equation?

At any rate, governments don't need to "pay down debt" (which is kind of a strange thing to say, since the government is always paying off bonds.) They just need to grow the economy such that the debt is less substantial, which pretty much everyone has always done. I mean, the US wasn't going through times of tribulation paying off its 100%+/GDP debt after WWII, we just inflated it away.

thoward3• 11 years ago

Here's an interesting meta-study about the effects of a high debt to gdp ratio.

http://www.nber.org/papers/w16827

I admire the candor of your second point ("we just inflated it away.") I think this is ultimately what will happen here in the USA.

I think that most people would choose austerity now over higher inflation down the road, but maybe I'm delusional. Our consumer savings rates continue to trend down so maybe people just wouldn't care much.

http://www.tradingeconomics.com/united-states/personal-savin...

Paul Krugman: The austerity delusion

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