Krugman off-base on economic recovery projection
Economist Paul Krugman said, Tuesday, that the US has a clear path to economic recovery.
A European Union flag waves under Acropolis hill in Athens, on March 26. Krugman said, Tuesday, that the US is better off than Greece and has a clear path to economic recovery.
Thanassis Stavrakis/AP
We just stepped off the plane鈥� We鈥檒l have to catch our breath and open our eyes before we have anything to say about China鈥�
In the meantime, let鈥檚 look back at what is happening in Europe and America.
And we will begin by thanking Paul Krugman, economiste ordinaire at The New York Times.
Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when we鈥檙e alone. And far from home.
Maybe we鈥檙e wrong. Maybe we鈥檙e leading thousands of loyal Dear Readers astray. Maybe the Great Correction isn鈥檛 what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt.
What a relief it was to find Krugman in Tuesday鈥檚 International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, we鈥檇 have to re-think our position.
鈥淎merica is not Greece,鈥� he says. So far, so good. His geography is correct.
It is all downhill from there.
Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee.
The US is running about the same size deficit as Greece; but don鈥檛 focus on that, says Krugman. The two places are not the same, he insists. Because the US has a 鈥渕uch lower debt level.鈥�
He鈥檚 wrong about that. If you add to the US national debt the debts of Fannie Mae, GM, and all the other financial holes, which the government will ultimately have to fill, the crater is about 120% of GDP 鈥� the same as Greece鈥檚 debt.
鈥淓ven more important,鈥� he writes, 鈥渋s that we have a clear path to economic recovery.鈥�
Oh. Where鈥檚 that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles. There are now nearly as many people relying on the US government for food as the entire population of Spain. There are about as many people unemployed in the US as the entire populations of Greece, Portugal and Ireland鈥ombined. And there are as many people who have gotten negligible income gains as鈥ell鈥he entire population of America.
Without more income, how can Americans increase spending? Without more spending, how can the economy really grow?
The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend. And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman can鈥檛 tell the difference. But government spending generally produces negative real growth.
Nevertheless, Krugman explains that IF the economy improves鈥nd IF the administration cuts deficits鈥nd IF the new health care program doesn鈥檛 cost more than the Obama team says it will 鈥� heck鈥verything will work out just fine! With a few tax increases, of course.
Then, he tells us that, yes, over the long run we鈥檙e going to hell in a handcart. But that problem can be solved by a 鈥渃ombination of health care reform and other measures.鈥�
Finally, he鈥檚 right about something. Enough 鈥榦ther measures鈥� and you鈥檝e got the problem licked.
What other measures? Well, the deficit is now at about 10% of GDP. So, all you鈥檝e got to do is to cut spending by 11% of GDP and you鈥檝e got a surplus. Let鈥檚 see, where are we going to cut $1.4 trillion dollars? That鈥檚 cutting out 100% of the defense budget. And 100% of Social Security too.
And if you don鈥檛 do that鈥ou get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then you鈥檙e Greece.
What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. They鈥檒l think that the US can borrow as much as it wants for as long as it wants鈥�
In The Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is 鈥渮ero.鈥� He says deficits don鈥檛 lead to trouble. The US has been running deficits since the 鈥�70s, he points out.
And look at the Japanese, he adds. They鈥檝e been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And they鈥檙e still able to borrow at practically zero interest.
Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasn鈥檛.
A man jumped off the 65th floor of a skyscraper. As he went by the 11th floor, the secretaries heard him remark:
鈥淎ll right so far.鈥�
The US is all right so far. So is Japan.
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