[THS] Paul Krugman: That 30s Feeling

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article25777.htm


That ’30s Feeling

By Paul Krugman

June 19, 2010 "NYTimes" June 17, 2010 -- 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.’s 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 — 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.

What’s the economic logic behind the government’s moves? The answer, as far as I
can tell, is that there isn’t any. Press German officials to explain why they need to
impose austerity on a depressed economy, and you get rationales that don’t add up.
Point this out, and they come up with different rationales, which also don’t 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.

Here’s roughly how the typical conversation goes (this is based both on my own
experience and that of other American economists):

German hawk: “We must cut deficits immediately, because we have to deal with the
fiscal burden of an aging population.”

Ugly American: “But that doesn’t make sense. Even if you manage to save 80 billion
euros — which you won’t, because the budget cuts will hurt your economy and
reduce revenues — the interest payments on that much debt would be less than a
tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten
economic recovery while doing next to nothing to improve your long-run budget
position.”

German hawk: “I won’t try to argue the arithmetic. You have to take into account the
market reaction.”

Ugly American: “But 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?”

German hawk: “You just don’t understand our situation.”

The key point is that while the advocates of austerity pose as hardheaded realists,
doing what has to be done, they can’t and won’t justify their stance with actual
numbers — 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:
They’re 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 can’t 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, it’s 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. “The last few hours were a
singular show of strength,” declared Angela Merkel, the German chancellor, after a
special cabinet meeting agreed on the austerity plan. And showing strength — or
what is perceived as strength — is what it’s 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. Europe’s 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 — and politicians around the world are following their lead.

How bad will it be? Will it really be 1937 all over again? I don’t 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.