
Paul Krugman: The austerity delusion - jhnpckr
http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion
======
jhulla
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.

~~~
Amezarak
> 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.

~~~
jhulla
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.

~~~
Amezarak
> Perpetual QE + ZIRP is not in ur economic textbooks and I do not believe our
> models can tell us what is coming.

That very situation is what Krugman did a lot of his academic work on. So far
it's played out mostly like what he and other mainstream economists predicted.
You can always say "until it doesn't", but that's the nature of life. We have
to go with what we know.

It's not as if Krugman _wants_ QE + ZIRP; he'd rather get out of it ASAP with
his _actual_ policy prescription (fiscal policy), but he's had to settle for
QE/ZIRP.

> Yet there are many economists, myself included, who regard this view [that
> QE will be effective and give us a strong recovery] as highly unrealistic,
> yet support more aggressive Fed action all the same. Why? First, because it
> might help and is unlikely to do harm. Second, because the alternative —
> fiscal policy — may be of proven effectiveness, but is also completely
> blocked by politics. So the Fed’s efforts are all we have.

[http://krugman.blogs.nytimes.com/2013/07/27/miltons-
paradise...](http://krugman.blogs.nytimes.com/2013/07/27/miltons-paradise-
still-lost/)

~~~
jhulla
> So far it's played out mostly like what he and other mainstream economists
> predicted.

Oh christ on a cracker.

Mainstream economists should have all taken their PhD diplomas off their walls
and collectively shredded them in the fall of 2008.

Under the watchful eyes of mainstream economists at the Federal Reserve, the
watchful eyes of academics at institutions worldwide, the global financial
system melted down.

Now, we are to believe that these same folks who couldn't see the 2008-2009
crisis know exactly how to lead us out.

------
pluckytree
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
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
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.

~~~
sjg007
The UK will have a big problem in 10 years when there are still no jobs for
young adults.

------
jpfr
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.

~~~
Amezarak
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.

~~~
adventured
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.

~~~
Amezarak
In what sense do you mean Japan has "debased" the yen? Inflation has been
virtually nonexistent. A weaker yen promotes exports; obviously not something
that is automatically bad for the economy. It's absolutely not true that
having a weaker currency means growth is illusory.

~~~
adventured
If you reduce the value of your currency by 25%, and get 3% GDP growth in the
process, you have to adjust the baseline lower and what you've actually got is
a drastic reduction in real economic value.

The Japanese government has been aggressively devaluing the Yen, because
they're bankrupt and can no longer afford to pay even the interest on their
debt without either using printing or new debt issuance. They're stuck in a
downward spiral. Japanese savings have collapsed to zero, so the Japanese
people can no longer afford to fund continued government debt expansion as
they were before. That has left the Japanese government with no other options
but currency debasement, ie devaluing the real worth of outstanding Yen based
debt (which is mostly held by Japanese citizens, which is then ultimately a
slashing of their wealth).

Japan has suffered zero deflation over the last 25 years. That's why Japan is
one of the most expensive places on earth to live in most every respect. If
they had suffered 25 years of deflation, their prices would have gone down
accordingly.

Their long-term price index shows zero deflation.

[http://i.imgur.com/Cvwj26A.png](http://i.imgur.com/Cvwj26A.png)

The notion they've been stuck in deflation is keynesian economists confusing
what deflation is. Under keynesian economics, if a bubble is inflated, and
then bursts, taking down real estate prices, they call those falling prices
deflation - when in fact it is not. This is one of the many obvious flaws at
the heart of keynesian economics, which has helped lead the globe into its
current perpetual stimulus addiction path.

~~~
mdemare
> If you reduce the value of your currency by 25%

It is the dollar that has appreciated, not the yen that has depreciated. The
dollar has appreciated against most currencies in the last year – probably
because people expect interest rate hikes this year. It has nothing to do with
Japan per se.

------
nostromo
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.

~~~
douglasisshiny
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?

------
trhway
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."

------
nawitus
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...](http://www.spectator.co.uk/features/9475222/the-coalitions-
jobs-record-is-miraculous-why-wont-they-talk-about-it/)

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

------
anm89
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.

~~~
mikeash
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...](http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html)

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.

~~~
anm89
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.

~~~
mikeash
I'm curious, why is my version an after the fact justification, but yours
isn't?

~~~
AnimalMuppet
I believe that amn89 was saying that _Krugman 's_ version was an after the
fact justification.

------
bitL
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.

------
thoward
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?

~~~
Amezarak
> 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.

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

[http://www.nber.org/papers/w16827](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...](http://www.tradingeconomics.com/united-states/personal-savings)

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

I know you're sincere, but I kind of had to laugh. Reinhart and Rogoff have
been through the ringer for publishing that paper, which is almost entirely
bunk. There was a huge storm that made it even to the mainstream media about
how truly flawed that paper was (with errors getting as basic as "they can't
use Excel.") It's even mentioned in the OP.

To be fair, the claim that slower economic growth is correlated with high debt
is somewhat true. But most argue causation is in the other direction: slow
growth causes high debt.

> I admire the candor of your second point ("we just inflated it away.")

You might recall that the time period in which we inflated that debt away was
one of the most prosperous for all Americans.

Meanwhile, austerity will directly lead to people losing their jobs and an
economic slowdown that will prolong the suffering people are already going
through...for what?

~~~
thoward
I'll concede the point on the R&R paper. Didn't know there was so much
controversy about it, and the accusations that some of their findings were due
to a technology glitch are pretty damning.

But still, the median age of the US population in 1950 was 30 years old. Today
it's over 37 and climbing. And (not to beat a dead horse) the savings rate is
half what it was then.

To me that indicates that a far larger percentage of our population is going
to be living on (paltry) fixed incomes than at any other time. Inflation would
be crushing to our aging population.

I just don't think you can compare our situation to the 1950's.

------
elchief
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...](http://www.theguardian.com/business/2015/jan/28/bank-england-
governor-attacks-eurozone-austerity)

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

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

~~~
Amezarak
No, it's not a "No True Scotsman" fallacy. Greece, crucially, does not print
its own currency and there was no real lender of last resort available at the
time.

It's been a trivial exercise for many years to point out that countries with
even more debt than Greece are not going into debt crises for those exact
reasons, with Japan as the almost canonical example with its still-low
interest rates.

------
mudil
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.)

~~~
Mikeb85
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.

------
pbreit
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
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_.

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

