That â30s Feeling
By PAUL KRUGMAN
Published: June 17, 2010
BERLIN
Fred R. Conrad/The New York Times
Paul Krugman
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.âs premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places â and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
Whatâs the economic logic behind the governmentâs moves? The answer, as far as I can tell, is that there isnât any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that donât add up. Point this out, and they come up with different rationales, which also donât add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.
Hereâs roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):
German hawk: âWe must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.â
Ugly American: âBut that doesnât make sense. Even if you manage to save 80 billion euros â which you wonât, because the budget cuts will hurt your economy and reduce revenues â the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity youâre pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.â
German hawk: âI wonât try to argue the arithmetic. You have to take into account the market reaction.â
Ugly American: âBut how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?â
German hawk: âYou just donât understand our situation.â
The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they canât and wonât justify their stance with actual numbers â because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.
So the real motivations for their obsession with austerity lie somewhere else.
In America, many self-described deficit hawks are hypocrites, pure and simple: Theyâre eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we canât afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, itâs about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. âThe last few hours were a singular show of strength,â declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength â or what is perceived as strength â is what itâs all about.
There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europeâs troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering â and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I donât know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.
http://www.nytimes.com/2010/06/18/opinion/18krugman.html?ref=opinion
By PAUL KRUGMAN
Published: June 17, 2010
BERLIN
Fred R. Conrad/The New York Times
Paul Krugman
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.âs premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places â and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
Whatâs the economic logic behind the governmentâs moves? The answer, as far as I can tell, is that there isnât any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that donât add up. Point this out, and they come up with different rationales, which also donât add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.
Hereâs roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):
German hawk: âWe must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.â
Ugly American: âBut that doesnât make sense. Even if you manage to save 80 billion euros â which you wonât, because the budget cuts will hurt your economy and reduce revenues â the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity youâre pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.â
German hawk: âI wonât try to argue the arithmetic. You have to take into account the market reaction.â
Ugly American: âBut how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?â
German hawk: âYou just donât understand our situation.â
The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they canât and wonât justify their stance with actual numbers â because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.
So the real motivations for their obsession with austerity lie somewhere else.
In America, many self-described deficit hawks are hypocrites, pure and simple: Theyâre eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we canât afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, itâs about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. âThe last few hours were a singular show of strength,â declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength â or what is perceived as strength â is what itâs all about.
There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europeâs troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering â and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I donât know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.
http://www.nytimes.com/2010/06/18/opinion/18krugman.html?ref=opinion
