Saturday, October 19, 2013

No Triumph for Austerity with Krugman

European austerity was never a solution for a credit collapse and Europe has proved that once again.  It is the solution for a runaway spending boom leading inevitably to a credit collapse.  Of course, they got it backward.  The USA of course threw the cash at the collapsing credit bubble so that none of it actually helped at all.  Again a completely improper response to the crisis.

What happens in a credit collapse is that maturities contract hugely stranding capital and causing forced deflation of assets underlying all credit instruments.  This drives the cost of borrowing up regardless of interest rates.

What needs to happen is that credit needs to be expanded horizontally.  The slow way is the current scenario and that will drag on for years.

No Triumph for Austerity

Tuesday, 01 October 2013 12:56
By Paul Krugman

It was, I suppose, predictable that Europe's austerians would claim vindication at the first hint of an economic upturn. Still, an op-ed by the German finance minister, Wolfgang Schäuble, in the Financial Times, in which he claims complete vindication because Europe has had one, count it, one quarter of growth, is pretty awesome even relative to expectations.

It takes quite a lot of chutzpah — do they have that word in German? — to claim that this is a record of successful preparation for structural transformation. What about all the livelihoods, and in some cases lives, destroyed? What about the millions of young Europeans who still have no hope of getting a decent job?

I take particular professional exception to Mr. Schäuble's claim that Europe is following the recipe of Sweden in the early 1990s and that of Asia in the late 1990s. Those recipes involved large currency devaluations, not the slow, grinding "internal devaluation" supposedly happening in countries on Europe's periphery. And as I've stressed a number of times, the Asian economies bounced back fast, with nothing like the seemingly endless depression in much of Europe.

What we have to realize here, however, is that at this point it's not just a matter of ideology: egos and careers are at stake.

The evidence suggests that Europe's austerians did a terrible thing, ruining the lives of millions. They will never admit it; they will seize on anything that gives them an out.

In Front of Their Noses

The economist Antonio Fatas is, like me, boggled by the apparent inability of the Organization for Economic Cooperation and Development to even contemplate the possibility that Europe's poor economic performance is the result of fiscal austerity.

At one level, of course, it's perfectly understandable. The O.E.C.D. in general — and Pier Carlo Padoan, in particular, as chief economist — was among the biggest and earliest cheerleaders for austerity; you can see why they don't want to admit that they were, in fact, cheerleading Europe into disaster.

Still, it's kind of depressing. What we've just had in the euro zone is as close to a natural experiment in fiscal policy as you're ever likely to see, and the results overwhelmingly support a Keynesian view. You might expect some acknowledgment, some revision of views.

But that's not the way the world works. George Orwell knew all about it. From his essay, "In Front of Your Nose":

"The point is that we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield ... To see what is in front of one's nose needs a constant struggle."

And not many influential people are into that kind of struggle.

© 2013 The New York Times Company

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007). 

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