“Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole.”
Let us fisk this:
“The story so far: In the years leading up to the 2008 crisis, Europe, like America, had a runaway banking system and a rapid buildup of debt. In Europe’s case, however, much of the lending was across borders, as funds from Germany flowed into southern Europe. This lending was perceived as low risk. Hey, the recipients were all on the euro, so what could go wrong?”
Nice piece of snark, which I do not demur from.
“For the most part, by the way, this lending went to the private sector, not to governments. Only Greece ran large budget deficits during the good years; Spain actually had a surplus on the eve of the crisis.”
That may be true. I have not checked. However, the fact that Spain’s public finances went down the toilet so fast does not quite suggest that the Spanish public sector was a model of mean-minded prudence.
“Then the bubble burst. Private spending in the debtor nations fell sharply. And the question European leaders should have been asking was how to keep those spending cuts from causing a Europe-wide downturn.”
No, they should have been facing up to the fact that a vast number of mal-investments were caused by a decade of under-priced credit, and that there was no way that such a build-up of bad investments can be unwound painlessly. Seeking to hold off the pain by increasing public spending (and hence scaring the hell out of the global bond market) is hardly likely to achieve the desired effect.
“During the years of easy money, wages and prices in southern Europe rose substantially faster than in northern Europe. This divergence now needs to be reversed, either through falling prices in the south or through rising prices in the north. And it matters which: If southern Europe is forced to deflate its way to competitiveness, it will both pay a heavy price in employment and worsen its debt problems. The chances of success would be much greater if the gap were closed via rising prices in the north.”
That may be true in crudely political terms; after having enjoyed the fat years, those who have done so are not likely to enjoy a lean period. However…
“But to close the gap through rising prices in the north, policy makers would have to accept temporarily higher inflation for the euro area as a whole. And they’ve made it clear that they won’t. Last April, in fact, the European Central Bank began raising interest rates, even though it was obvious to most observers that underlying inflation was, if anything, too low.”
Well, it seems a bit glib to assume, as Keynesians like Professor Krugman do, that the inflation will prove to be temporary… Riiiight… One key problem for the eurozone, as he ought to know, is that labour markets in much of the region are so heavily regulated that getting a meaningful adjustment in wages and prices is hard, and yet this has to happen if countries such as Greece and Germany are to co-exist under the same currency area without strife. The same issue, of course, would apply if the whole region were to adopt, say, an inelastic system of real money instead of fiat money issued by a central bank or banks.
Another point for Professor Krugman to remember is that in some member nations, such as France, there has been double-digit percent unemployment for the young long before anyone had heard about sub-prime or credit crunches. And Europe’s record for wealth and job creation, compared to that of the US prior to the crunch, has been and remains lamentable.
Krugman is so thoroughly invested in Keynsian lunacy that articles like this is all one could expect from him. The fact that it’s pure blather really doesn’t matter, as it provides cover to the politicians to do what they want to do anyway. For progressives and socialists, Krugman is one of the most useful of idiots.
On more than one occasion here I’ve railed against his wholly meritless Nobel; I see no need to repeat it again.
I hear from economist types that Krugman really did deserve his Nobel.
But it was for work on international trade – and expertise is not transferable, nor is it immune to the infection of being a partisan hack.
(Similarly, Einstein really deserved his Nobel, but that doesn’t mean his babblings about politics or international relations were or are of any value.)
Yes, I’ve heard that “he deserved it” nonsense, too. It gets spouted quite a lot. So I actually went and looked up the Nobel announcement when he was awarded the Prize, and later actually managed to find and read the original article upon which it was based. It’s utterly pedestrian and simply not prizeworthy. Here’s what I wrote about it last June (scroll down to my comment at 5:36 PM). I stand by it, notwithstanding the claims of “economist types” (who probably haven’t read it themselves, but are merely parroting what they’ve heard others say).
The “he didn’t deserve the prize” thing is based on a misunderstanding of what he got it for. He didn’t get the Nobel Prize for Economics, he got the Nobel Prize for Criticizing Bush.
At least Paul brings a fresh approach to economics. You neocons are spent (or bought or both). The Bush / Chaney / Greenspan model of the 2000’s proves that.
Bring back the paleocons.
Frank, bone up on what we actually think here before shooting your mouth off and making a fool of yourself.
Ken, I stand corrected.
“a fresh approach to economics”
This is a joke, right? Warmed-over Keynsianism (itself largely an internally inconsistent rehash of long-discarded economic theories) thoroughly discredited decades ago is “fresh” only to the economically illiterate.
Dear Sam,
Do you really think what you are doing here is “thinking?”
This is at best old, stale, and tired. At best.
The fact that Frank believes the folks here are neocons is pretty solid proof that economics isn’t the only thing he is illiterate in.
Frank. This blog has been nothing but hostile to what you call “The Bush / Chaney / Greenspan model”… which pretty much is the model that set the ground work for everything Obama is doing.
So clearly you do have not bothered to look beyond the trigger words, hence the hostile reception to your comment calling us ‘neo-cons’… which I might add it a fairly meaningless term anyway given that vast regulatory interventionist statism is the conventional thinking in both of the main US parties (such as the massive Bush bailouts and crazed money printing and the even more massive Obama bailouts and even more crazed money printing).
“Only Greece ran large budget deficits during the good years”
Krugman liar. Portugal also. Italy also.
I suspect Frank thinks some Samizdata writers are neocons due to support for the overthrow of Saddam and the Taliban after 9/11. But you don’t have to be a neocon to have supported such things. Just a guess, anyway.
Krugman has argued that WW2 helped end the Great Depression, which sounds a bit neocon and maybe an example of his “refreshing approach to economics”.
The more I see the more I can’t believe that these jokers really think that the credit-debt expansion wasn’t Govt related. i.e. planned.
Looking forward to what will come is not a short sharp adjustment. We in the west will slowly over many years have to reduce our standard of living while we pay for the prosperity we borrowed from our own and our childrens futures.
The entitlement classes including pulic sector workers and the relatively unskilled workers spat out of the capitalist system will be very unhappy for a long time. No growth, No work and No money to continue the insanity of the public sector pay dance. All done slowly to really build that haterd and anger up, aim it at the bankers (who according to the media are the definition of capitalism). Lots of focus on those who still have money.
In whose political interest would it be to have whole continents with half their young people out of work? and pensioners without pensions? What policies will people vote for when they can’t pay the public sector bills? Taxation of standing capital? We’ll see.
From a game theory point of view for a socialist, what would be the state most favourable to a socialist revolution? Are we really going to be that far from it? If you are someone who believes that a socialist/communitarian state is a perfect moral good then is creating this kind of position to build from justifiable?
Perry you are wasting your time with Frank
He reminds me of a letter writer in this week’s edition of the Spectator who in a standard rant against “neocons” started attacking Glenn Beck.
Now Beck may be a lot of bad things – but “neocon” is not one of them (and I must stress that the letter writer was attacking Beck NOW – not Beck back in the days when he was a hopeless drunk, who knows what political opinions came out of his mouth in those days).
When we here the word “neocon” we think of the actual doctrine (social democracy at home and war for democracy overseas – basically domesitc and foreign Woodrow Wilsonism).
No one here believes in social democracy (i.e out of control entitlement programs and so on) and no one here believes in wars to make the Middle East fluffy.
Although yes GUILTY AS CHARGED I supported hunting down Bin Laden (and co) with government military force.
But when Frank uses the word “neocon” he simply means “someone who is not in my faction”. People like Frank are not interested in building alliances against the left.
Indeed I doubt that Frank would even see a difference between someone like George Bush (wild spending fool though he was) and someone like Barack Obama (life long Marxist – whose whole being is consumed with hatred for the West generally and the United States in particular).
And someone who can not see a difference between Bush and Obama is just silly. A wrongheaded President like Bush may (unintentionally) PREPARE THE GROUND for someone like Obama – but that is not the same thing as there being no difference between them.
As for Paul Krugman….
Laird and Ken are correct.
As for the prize (of course it should not be called a “Nobel” as Alfred had nothing to do with it).
The days when it was awarded to Hayek (and he had to share it with a leftist – the same year) are long gone.
The committee may award it to a free market supporter – but not to one who actually speaks up and presents the case to the public in the mass media.
Whereas leftist bladder mouth types (such as Krugman and Stiglitz) get the prize – no problem.
Someone like Milton Friedman (great on everything bar monetary policy – although as Murray Rothbard used to say “THEREFORE Friedman talked about monetary policy most of the time”) would not get the prize today.
Any more than they would have a regular column in the mass media today.
Didn’t they give a nobel prize to Obama? Obviously, they’ll give out prizes to anyone! Just put in your nomination, claiming you thought about voting for Obama, and see your Nobel delivered in the mail! I suggest you leave space on your mantel-piece right now!