In his latest column, Paul Krugman returns to his familiar arguments against “austerity”, which is to say in favor of more government spending, which argument he furthers by rather humorous means of ignoring the facts. Under the title “Europe’s Austerity Madness”, Krugman declares that “austerity has already gone too far” in Europe and “[m]ore austerity serves no useful purpose”. He asks us to:
Consider Spain’s woes. What is the real economic problem? Basically, Spain is suffering the hangover from a huge housing bubble, which caused both an economic boom and a period of inflation that left Spanish industry uncompetitive with the rest of Europe. When the bubble burst, Spain was left with the difficult problem of regaining competitiveness, a painful process that will take years. Unless Spain leaves the euro — a step nobody wants to take — it is condemned to years of high unemployment.
But this arguably inevitable suffering is being greatly magnified by harsh spending cuts; and these spending cuts are a case of inflicting pain for the sake of inflicting pain.
First of all, Spain didn’t get into trouble because its government was profligate. On the contrary, on the eve of the crisis, Spain actually had a budget surplus and low debt. Large deficits emerged when the economy tanked, taking revenues with it, but, even so, Spain doesn’t appear to have all that high a debt burden.
So what is Spain’s problem? Well, there was a “huge housing bubble” that burst. But notice that there is no indication that Krugman considers the bubble to have been the disease. Rather, it was merely the bust that was the disease. What caused the housing bubble? As in the U.S., central bank inflationary monetary policy of keeping interest rates artificially low—the very policy Krugman advocated in the wake of the dot-com bubble, as I extensively document in my book Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.
We’ll come back to that. But, first, look at what he says about Spain. Spain didn’t get into its current predicament by spending too much, Krugman argues, but simply because its revenues plummeted with the collapse of the housing bubble (again, the disease, in his view, is not the artificial boom, but the bust). This, he argues, was the source of Spain’s large deficit. But it’s funny to click his link and see what the report he cites to support his argument actually says:
The sudden deterioration of Spain’s public finances from a position of apparent strength in 2007 appears to be the result of a number of factors. Firstly, the authorities responded to the economic downturn with a large-scale fiscal stimulus package which increased the structural budget deficit by an estimated three percent of GDP in 2008.
So, far from implementing “austerity” in response to the collapse of the housing bubble, Spain’s deficit problem was indeed a consequence of increasing spending. But, wait, there’s more! While Krugman paints a picture of a Spanish economy in good shape before the bubble burst, his source continues:
In addition, the initial fiscal position was not as strong as it appeared. Much of the decline in the deficit in the late 1990s was the result of a shrinking bill for interest payments brought about by the sharp decline in bond yields that preceded Spain joining the European Monetary Union (EMU) – essentially a one-off boost to the budgetary position. The fiscal position was also boosted prior to the recession by ‘boom-time’ revenues generated as a consequence of the rapid growth of consumer spending and the surging real estate market. IMF estimates suggest that the boom in the Spanish housing sector increased tax revenues by 2.5–3 percent of GDP from 1995–2007, more than half the increase in tax revenues as a percent of GDP in this period.
So there is an element of truth to what Krugman said. Only, he chooses to simply spin the facts to suit his argument. Again, according to Krugman, Spain was doing pretty well until the bubble burst, and only then did its revenue decrease. But according to his own source, Spain wasn’t really doing pretty well prior to the bust. Krugman simply refuses to acknowledge that by definition the bubble was a period of artificial and unsustainable growth. He refuses to see that this illusion of prosperity was itself the disease, and the bust not merely a symptom, but the cure. This willful blindness is evident in Krugman’s prescription: doing more of the same that caused the problem in the first place, i.e., more inflation and artificially low interest rates and more government borrowing and spending.
He also declines to mention to readers that his own source agreed that “strong action” with the goal of “bringing the public finances back under control” was required, otherwise “there could be serious negative consequences for growth”—real growth, not the artificial, unsustainable kind that Krugman perpetually advocates, as though wealth came from a printing press. In fact, the report he cited to support his argument argued that that there was a “risk” that Spanish politicians might “prove unwilling to continue with such stern austerity measures” as would be required to get the budget under control and establish a firm foundation for sustainable growth in the future.
Krugman nevertheless argues that “Spain doesn’t need more austerity”. Ignoring his own source, he states further that “savage cuts to essential public services, to aid to the needy [sic], and so on actually hurt the country’s prospects for successful adjustment.”
Then he states:
Why, then, are there demands for ever more pain?
Part of the explanation is that in Europe, as in America, far too many Very Serious People have been taken in by the cult of austerity, by the belief that budget deficits, not mass unemployment, are the clear and present danger, and that deficit reduction will somehow solve a problem brought on by private sector excess.
So if you believe that people should learn to live within their means, you are a cultist. If you believe governments should not run budget deficits, you are a cultist. If you recognize that the mass unemployment was brought about because governments and their central banks followed the very policy prescription Krugman advocated, you are a cultist. Finally, notice how he blames “private sector excess” for the bubble, when he knows perfectly well that the housing bubble was a consequence not of the free market, but of intervention in the free market—specifically, the very policy he advocated then and continues to advocate now of printing money to artificially reduce interest rates in an effort to try to reinflate another bubble.
Look at what he wrote a couple of weeks ago. In declaring his support for the Federal Reserve’s decision to launch QE3, he wrote:
Now, many people on the right have long been obsessed with the notion that we’ll be facing runaway inflation any day now….
Sure enough, last week’s Fed announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher….
So last week we learned that Ben Bernanke is willing to listen to sensible critics and change course.
Not much reassurance there that we won’t be facing runaway inflation, perhaps not “any day now”, but at some point in the future if the Fed continues to follow Krugman’s policy prescriptions by just running the printing presses until it eventually somehow magically fixes the economy.
In his next column after that, he wrote:
What’s holding us back is mainly the continued weakness of housing combined with a vast overhang of household debt, the legacy of the Bush-era housing bubble.
Naturally, he’s all for the Fed’s policy of trying to reinflate the housing bubble by monetizing mortgage-backed securities under QE3. Notice how he describes it as a “Bush-era housing bubble”—as though it was a consequence of Republican policies (his main thrust of this column was to criticize Mitt Romney). This is a repetition of a new narrative of his that the bubble was the Republicans’ fault—a nifty way to deflect attention away from the fact that it was actually the consequence of the Fed following the very inflationary monetary policy he had advocated.
Then, offering even less reassurance that we will not see runaway inflation, in his blog last week, Krugman wrote:
So Fed hawks are all upset that expected inflation has risen since Bernanke announced QE3 — as indeed it has….
Is this alarming? On the contrary, it’s the main purpose of the exercise. In simple models of expectations-based efforts to get out of a liquidity trap, the only way the Fed can get leverage is by promising higher inflation once the liquidity trap is over.
Did you get that? He brags further into his post, “I understand what he’s doing”, unlike those “Fed hawks” who warn against inflation, failing to understand that “promising higher inflation” is “the main purpose” of QE3. Oh. Well, that this is the whole point makes it better, I guess. Not.
Why does anyone still listen to this guy? Does it make any sense at all to listen to the guy whose prescriptions caused the economic mess we are in in the first place for advice on how to get out of it?