The Greek debt crisis has Paul Krugman waging a verbal war against those he called Austerians, meaning economists who think the solution to being up-to-your-ears in debt is to cut back on spending. (It’s also a pun on Austrian economics, which generally opposes government intervention in just about anything.)
“Greece was overspending, but not by all that much,” claims Krugman. “It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170 percent of GDP despite savage austerity?” The answer, he argues, is the austerity measures themselves “are the obvious culprits.”
Never mind the fact that tax avoidance in Greece is a national sport, that Greece doesn’t bother to make sure people pay user fees for public services like rail transport, and despite collecting so little fares the country lavishly pays rail workers an average of nearly $75,000 a year so that the rail system costs seven times as much to operate as it returns in revenues. Krugman’s solution is to spend more, thus effectively excusing people for not paying taxes or fares and for demanding high pay and pensions for jobs that produce little economic benefit.
Now the United States has its own mini-Greece, also known as Puerto Rico, which has $76 billion in debt against its gross domestic product of about $100 billion. For comparison, when General Motors went bankrupt, it had $35 billion in debt against its gross revenues of more than $200 billion–in other words, more than twice the income but less than half the debt.
Krugman’s solution for Puerto Rico would, no doubt, be for it to go further into debt and spend even more. Yet that’s what’s been doing for the last seven years and it hasn’t worked.
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Krugman’s policies didn’t work in Japan. They didn’t work in Puerto Rico. They wouldn’t work in Greece.
Krugman’s problem is that he has a simplistic model of the macroeconomy in mind: more spending equals more economic activity equals more wealth. But not all spending is equal. If Henry Ford had mass produced buggies instead of cars, he wouldn’t have had any impact on the world. Building an obsolete tren urbano in Puerto Rico didn’t have anywhere near as much impact on the economy as the territory’s minimally regulated and unsubsidized públicos, except for the fact that it added greatly to the debt.
Take a look at how well the trillion-dollar stimulus bill worked in 2009. Krugman claims it failed because it should have been $3 trillion instead. But the real problem is that most of the money went to pay off powerful interest groups, not to do things that actually stimulate the economy. As a result, our economy, like Japan’s, has lumbered along with real GDP per capita today being hardly more than it was in 2007.
Thanks in part to this bill, the United States’ own debt-to-GDP ratio is now more than 100 percent. We can maintain (and increase) that ratio only because dollars have become the world currency. But what happens when creditors decide we are no longer good for it? The solution won’t be to spend more.
Austerity is not the solution. Instead, it is common sense. Don’t spend more than you take in. Don’t go into debt unless you spend it on things that will earn revenues to repay that debt. Don’t sign contracts that you know you can’t afford to pay for. Allow private investors rather than taxpayers to take the risks and also allow those investors to get the rewards when the risks pay off. Government can best stimulate the economy not by trying to substitute for the private sector but by getting out of the way.
How can something so obvious be contested? Doesn’t Klugman have a salary and manage a household? How can he still be paying his bills if he keeps spending more than he takes in??
Economic laws are just that, laws and the approching “Debt Bomb” is one such law.
I have heard people say they don’t believe in the “Debt Bomb”.
The trouble with that is that economic laws are not a religion you can choose to believe in or not.
They are mathmatical facts, like 1+1=2.
Calling practical people, who know that if you find yourself in a hole the first thing to do is to stop digging, names to try and belittle them does not change economic laws one bit.
These spenders are the same people who had a fit about the sequester and calling it spending cuts.
When really it was just to reduce the increase in spending to 6% above the inflation rate from 8% abouve the inflation rate. That’s not a cut in spending.
Glad to see an article on debt and Greece
and Krugman.“Austerity is not the solution. Instead, it is common sense. Don’t spend more than you take in.”
Well, that’s great advice for not getting into debt in the first place. What’s your proposed solution for Greece and the US paying down the massive debts they’ve accumulated?
“Never mind the fact that tax avoidance in Greece is a national sport…”
No let’s mind that. Surely government spending in Greece and the US is a problem, but with a 2015 $500+ billion deficit in the US and hundreds of billions being dodged in taxes I think it’s important to discuss tax avoidance.
Funny. Thoreau was something of a tax avoider gutter in large part to what he perceived as unconstitutional foreign policy. The billions in tax avoidance pale in comparison to the money printed for imperialistic adventures in Iraq and Afghanistan. Not to mention the cost of our far-flung outposts and occupations. Bring the troops home, and not just those in Germany and Japan, and then let’s look at the deficit and tax avoidance.
How can something so obvious be contested? Doesn’t Klugman have a salary and manage a household? How can he still be paying his bills if he keeps spending more than he takes in??
Krugman knows very well the things he writes aren’t true. But he benefits socially, politically and professionally by writing trite fairy tales.
Plus, he knows that the readership for trite fairy tales is large in number, and it’s easy money to write the same column over and over again.
It doesn’t matter what Krugman and the rest of the chattering class says, just watch what happens to Greece and then probably Portugal and Spain. Illinois can’t be too far behind. As Maggie Thatcher famously said, The problem with socialism is that you eventually run out of other people’s money.
Krugman’s stuck in his Upper West Side ideological enclave, surrounded by his fawning fans. Another newspaper person several decades back accurately described this rarefied atmosphere:
I think you meant to say evasion, not avoidance. Tax avoidance is legal, tax evasion is not.
In absolute terms the US has the highest dollar amount of tax evasion. In relative terms the US is very low due mostly to its low overall tax burden. Tax evasion amounts to 8% of GDP in the US compared to 25% in Greece.
“Greece was overspending, but not by all that much,” claims Krugman. “It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170 percent of GDP despite savage austerity?” The answer, he argues, is the austerity measures themselves “are the obvious culprits.”
This is just outright sophistry. Greece has had high (and increasing) debt levels for at least the past two decades (see here). It’s a miracle that the EU even admitted them, considering that Greece has been greatly exceeding the EU’s debt guidelines since the EU’s inception.
Funny how he also fails to mention long-term structural weakness in the Greek economy as a contributing factor. Or the fact that previous deficit and debt levels had been misreported (probably intentionally) by the Greek government. Or that the government had invested significant amounts of money in rather risky types of securities, including those backed by mortgages in the US. Nope, it’s the austerity. Trust me on this one, guys.
No let’s mind that. Surely government spending in Greece and the US is a problem, but with a 2015 $500+ billion deficit in the US and hundreds of billions being dodged in taxes I think it’s important to discuss tax avoidance.
Depends on what you mean by ‘dodging’ taxes. There are plenty of tax expenditures at the federal level which by themselves could significantly reduce the deficit. Ending the exclusion of employer-paid contributions for medical insurance premiums and medical care would cut the deficit by 40% on its own.
But to me that’s beside the point. The US is fairly capable of managing its deficit and debt issues (assuming it wants to) since it still has a viable private economy. Greece, on the other hand, has some serious problems. It is not terribly competitive, even within the Eurozone, and doesn’t attract much in the way of foreign investment. Government spending already accounts for more than half of its output. Even worse, it seems determined not to undertake the kinds of reforms necessary to restore competitiveness.
But even so, I still have a hard time understanding what they mean when they say they can’t pay their debts. This is not a country that shies away from high tax rates. And it has a socialist-led government. Why are they not talking about raising taxes? Would that be considered ‘austerity’? And why are the people who voted in a socialist party so unwilling to pay for the level of government spending they apparently demand?
That’s easy. Because they think that someone else should pay. The greedy, rich Germans in Greece’s case.
Roger Kimball sums up this attitude:
The Death of Socialism, The New Criterion, April 2002
It doesn’t matter what Krugman and the rest of the chattering class says, just watch what happens to Greece and then probably Portugal and Spain. Illinois can’t be too far behind.
Illinois? How about Puerto Rico, which Krugman wrote about the other day.
@C. P. Zilliacus, thanks for the link. Krugman’s slipping into further irrelevancy:
Yeah, we see that problem with China. It’s so far away from the US mainland that they just can’t make a go of manufacturing and shipping products to the US. If only someone would invent something, some kind of vessel that carries cargo, that can travel between countries and continents in less than 24 hours. Wishful thinking I know. I doubt anything will ever replace wind-powered sailing ships.
What’s sad is that Krugman used to be an outstanding economist, winning the Nobel back in the 90s. Now it seems as if he just wants to be liked by all the popular kids, saying anything to stay in their good graces. I’m guessing that his junior high school experience was not a happy one.