Paul Krugman is at it again. For an economist that only has Keynesianism in his tool kit, every economic problem looks like a nail of government austerity. In today’s column (February 20, 2012) in the New York Times, smarmingly titled “Pain, without gain”, Krugman tut tuts the terribly misinformed Europeans that don’t believe the answer to more borrowing at a time of insolvency is more borrowing. As Krugman puts it, things didn’t have to be this bad. Bankruptcy is no reason to reduce spending, its is, in fact, cause for more:
For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.
The lessons of history to which he refers, of course, are the lessons of the Great Depression, where everyone (meaning the curious fraternity of present-day shamans known as the economics profession) finally realized that the prescription for collapsed demand is government spending in excess of revenues. Of course, it helped a great deal that in America when Keynesian-type deficit spending was finally tried, it was to fight a world war that resulted in American hegemony the world over. Aggregate economic output only returned to pre-Depression levels after victory was secure, but surely the doubling of America’s sphere of economic influence had nothing to do with the following two decades of domestic economic good times. It was all because the government hired people to dig holes and then hired other people to fill them in, in an orgy of Keynesian pointless activity. Because, you see, Keynesian deficits are inherently good, and their inherent goodness never reaches a point of diminishing marginal returns. The law of diminishing marginal returns that applies to every other economic good simply does not apply to Keynesian deficit spending. Never mind that deficit spending is the very reason European welfare states are floundering. More deficits are always the prescription. Greece, et al, must keep issuing loans it can’t repay. Germany’s empire-seeking days are long past. They won’t mind lending money to the Greeks so the Greeks can piss it away with no intent of ever paying it back. They’ll never force the Greeks into wholesale starvation like they did only a little over half a century ago.
Krugman’s right. Things don’t have to be this bad. They could be a lot worse. I’ll never forget the woman of Greek ancestry I met during a real estate closing I was conducting (I asked where she was from because her name was very clearly Greek and Birmingham has a fairly large Greek community). She told me how her sister, an infant at the time, had starved to death during the war. Mom couldn’t feed everyone, so chose to let the youngest one die. Yeah, things don’t have to be this bad. And profligacy is obviously the way out. Just ask Japan. As Krugman points out:
Meanwhile, countries that didn’t jump on the austerity train — most notably, Japan and the United States — continue to have very low borrowing costs, defying the dire predictions of fiscal hawks.
Indeed, Japan has very low borrowing costs. It also has not seen economic expansion of the type with which the Keynesian/Krugman camp are so enamored since, oh, say, 1990. Yeah, two decades of ZIRP and fiscal profligacy that would make Keynes blush has basically done…nothing. Nada. Japanese government debt is now approximately twice Japan’s annual gross domestic product. Still, sustainable growth seems more elusive than ever. Even the US, with its trillion plus dollar a year fiscal stimulus (annual deficits are fiscally-stimulative, no matter their source, or at least are according to Keynesians) for the last four years has only now, and just barely, returned to a pre-recession level of GDP. Nevermind the Fed’s own ZIRP and quantitative easing, pushing the total stimulus to surely something close to a year’s worth of GDP. All that stimulus really has things humming in America about now. Wouldn’t you agree?
But Krugman knows what America needs to do–just borrow money at the federal level to dish it out to the states. Since fiscal deficits at the federal level haven’t done much good, push the deficit spending down to the state and local level:
The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level. Remember all the fuss about whether there were enough “shovel ready” projects to make large-scale stimulus feasible? Well, never mind: all the federal government needs to do to give the economy a big boost is provideaid to lower-level governments, allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.
Never mind that he offers no evidence that hundreds of thousands of school teachers have been laid off, and even were half a million new teachers hired, that would only barely absorb about two months worth of new entrants to the labor force.
Krugman’s analysis is really nothing more than economic rationalization in the service of emotional political impulses. No country like Greece, or for that matter, Japan, with a population that is rapidly aging and dying off should borrow money in a vain attempt to forestall economic pain. There is no way Greece will ever grow out of its fiscal woes. Japan either. At least most of Japan’s debt is owed to itself, and until lately has enjoyed a phenomenal string of trade surpluses. Neither is true for Greece. It owes its debt to others (mainly European banks), and hasn’t seen a sustainable trade surplus since Aristotle’s days. But still, Krugman touts Keynesian deficit spending as the answer. And Krugman doesn’t really know Keynes, who said this about the intersection of economic analysis and population demographics:
The great events of history are often due to secular changes in the growth of population and other fundamental economic causes, which, escaping by their gradual character the notice of contemporary observers, are attributed to the follies of statesmen or the fanaticism of atheists.
But then, Keynes is to economics what Paul was to Christianity. Anyone can find a quote to support their views. The bottom line though is very simple. Austerity in the profligate European welfare states is inevitable. Without population growth, there is no quarter from which aggregate economic growth can arise. Every Euro, drachma (when Greece finally gets kicked out of the EU), or yen borrowed today will settle as a progressively heavier weight on a smaller, older and less vibrant population. One last of Keynes’ observations:
Most men love money and security more, and creation and construction less, as they get older.