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.
> 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.
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.
> 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.
> 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.
Here is Paul Krugman writing in a book review in 2014:
"Almost nobody predicted the immense economic crisis that overtook the United States and Europe in 2008. If someone claims that he did, ask how many other crises he predicted that didn’t end up happening."
I think QE + ZIRP saved us from a catastrophe in 2008-2009. Instead of thinking what got us to a point where such heavy-handed financial tools were necessary and moving away from the cliff, we've just used the QE tool over and over again. QE1,2,twist,3. QE in Japan. QE in Europe. The Chinese have yet to openly go down this path.
I don't in any way believe that Krugman knows what is coming. (I don't either.)
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
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.
Our last (and according to Yellen, et. al., our final)[1] QE was in October 2014. Is there a reason why you continue to talk about QE in the United States in the present tense?
QE is happening globally. As you noted, QE3 ended in the US Oct-14. On the final day of US QE3 ending, the Bank of Japan announced another round of QE in their economy.
One way to think of QE is global competitive devaluation to capture global demand. QE + ZIRP or even negative interests are the primary tool of central banks now. Capital misallocation continues on a global scale.
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.
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.
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.
> 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.)
> 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.
See, though, I don't think that's at all the case. Krugman isn't a dry writer at all, at least when it comes to his blog posts and political and economic commentary. To be sure, you find most of the more detail analyses on his blog (since the kind of posts he marks as "wonkish" would not be very popular in his column), but there's usually a lot of color to them and they're pretty accessible even to the layman. His blog (which leads you down a rabbit trail to other blogs written by all kinds of other economists) is what actually spurred my interest in economics. If anything, he gets in trouble for being too colorful.
I disagree with Krugman almost totally politically, but I find his blog worthwhile reading and it's just stunning to see how many people have no understanding whatsoever of what he says and believes. There's a whole cottage industry involved in setting up straw-krugmen and knocking them down.
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.
> 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.
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.
> 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.
> 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.
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.
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.
"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.
> That assumes you want to run the country/government like a business. I think that's a fairly large assumption.
The main difference between running a country and a business, is values and also means. Countries value certain qualitative indicators more than a typical business would (quality of life, crime, safety, etc...), and countries have more means to balance the books (things like printing money, ownership of resources, etc...).
Talking about money at small-business scale is more about simplifying the concepts, but to a certain degree, it applies.
The main difference between running a country and a business is that quite possibly the common sense assumptions that work at one scale don't hold at the other.
Economics is often counter-intuitive - especially at a global scale. People extrapolate their intuitions from household economics to national level and beyond. There's no guarantee that any of our assumptions are still valid when you consider the entire world as one closed system.
Well, you can go part way. In a business, there are investments, and there are expenses. Both involve spending money. What's the difference? Investments pay you back, and expenses don't.
There really isn't a problem with government making genuine investments. Needed infrastructure is a great example. They actually do pay even the government back, in the form of increased tax revenue.
The problem is that government often says that something is investment, but it's really just expenses. Bridges to nowhere, and a blizzard of other pork. But government decides where to spend via politics, not rational economic analysis, and so government spending is much less efficient than the label says.
Government should borrow to invest in the country. The problem is getting them not to borrow to throw the money away on political boondoggles.
Krugman doesn't claim that the U.S. has experienced (significant) austerity during the last couple of years, especially compared to Europe. See the chart, which shows that austerity peaked in summer 2011. [1]
In talking of austerity Krugman neglects monetary policy[1] ("The key measure you want to look at is the ratio of debt to G.D.P." [2]), yet that chart you reference is inflation-adjusted 2009 dollars. That is to say, it is an apples to oranges comparison if we are going to talk of Krugman's version of austerity.
QE is definitely not the opposite of austerity. Fiscal stimulus is.
QE means that the central bank buy up bonds. The hope is that this lowers interest rates on bonds, making it less attractive for banks to hoard bonds instead of lending money to companies wanting to invest.
And one of the reasons that this isn't having the desired effect is that companies are holding on to far more cash than normal and aren't investing it on future growth.
Australia had a much better idea at the beginning of the GFC, they paid $1000 directly to anyone who had paid at least $1 in taxes the previous year; poor people aren't afraid to spend money...
That's one of the key issues with the current QE process - essentially all the money has gone to the banks / funds etc. in he hope they'd lend it to other producers but the reality is they've used it to make their own profits at others expense.
A better approach might have been to give it to the people to spend, save, pay off debt as they wished.
I'd have given it to people on welfare as well as tax payers.
I'm always suspicious of people like Krugman who claim to know the answer but didn't see the crisis coming.
You might want to check this curated list of people who "predicted" the GFC. Some of the names on the list(s) were a surprise to me. The one person I respect greatly on this list is Steven Keen (he featured highly in both lists).
You're right, but I think you would yourself admit you're being pedantic, the great divide between policies in the US and EU was QE (until recently). It was wrong of the previous poster to paint the US as a country following austerity that was successful.
I see a lot of people in this thread claiming that massive QE equals fiscal profligacy, that it means that the Keynesians have gotten exactly what they want.
I see QE more as a band-aid, used because fiscal stimulus is politically unattainable, since Keynesians are out of power nearly everywhere. Hence my comment - it was not meant as a nickpick.
No, it was not wrong. I am simply using the definition of austerity that Krugman commonly uses (see my above post). UK has used QE since 2009[1], BTW, but only government expenditures goes into Krugman's definition.
your sources are bad and you should stop reading them, I've read both of the links you posted before when they were ripped apart by mainstream economists
And yet you provide no sources for this alleged ripping apart.
EDIT: Furthermore your response demonstrates you do not even understand my point. The purpose of the sources I have referenced are not to show support for economic plan A over economic plan B, rather they demonstrate the inconsistent and politically motivated arguments behind Krugman's anti-austerity stance. He states Europe is dangerously pursuing misguided austerity policy which he defines strictly as a cut to government expenditures. He then correlates that with a lack of GDP growth. Then, slyly, when talking of the US, he purports that austerity took place until 2011 when wiser heads prevailed, reversed the trend and then the economy boomed. The problem is, when evaluating the austerity of the US, his numbers include monetary policy, being adjusted for inflation. Why does he not do the same for Europe?
This is all to say, if Paul Krugman is your source "your sources are bad and you should stop reading them... they were ripped apart by mainstream economists".
> 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.)
I've better things to do than argue with a misinformed hater, educate yourself and stop listening to austrian charlatans.
Translation: I cannot counter why Krugman compares apples and oranges in his political crusade against austerity so I will rely upon ad hominem attacks.
Yes, anyone who doesn't worship your god must be an austrian charlatan.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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."
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.
> 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.
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.
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.
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.
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.
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.
> 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.
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.
> 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?
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.
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.
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.)
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.
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.
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.
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.
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.