Krugman On Austerity: How About Looking At The Facts For A Change?

New York Times economist and editorial writer, Paul Krugman, has headed the Left’s crusade against austerity, both in the United States and across the industrialized world. To Krugman, “austerity” does not denote a careful husbanding of government money. Rather austerity denotes unwisely large cuts in government spending that, he claims, threaten economic growth and recovery. Krugman bases his opposition to austerity on an empirical assertion that we can test; namely: “Across the advanced world, big spending cuts have been associated with deeper slumps.”

Krugman’s testable hypothesis, therefore, is: Countries that experience large reductions in government spending grow more slowly (or not at all or worse).

Just as some people speak before they think. Krugman seems to believe his asserting something to be true makes it true. The scientific method does not work this way, however. It requires that we first gather the facts on government spending and growth. Second, we must use these facts to test the Krugman hypothesis of a positive relationship between government spending and growth.  

The scientific method, so applied, shows Krugman’s facts to be wrong (where are the “big spending cuts”) and it refutes his hypothesis. Not a good day for Mr. Krugman. Next time, he should gather and test the facts before he writes.

 


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‘Austerity’ To Blame? But Where’s The Austerity?

Die-hard Keynesians bemoan that, with a few exceptions, the world’s economies are drowning in the quicksand of austerity. They preach we need more government spending and stimulus, not less. Northern Europe should bail out its less-fortunate neighbors to the South so they can pay their teachers, public employees and continue generous transfers to the poor and unemployed. If not, Europe’s South will remain mired in recession. In America, Keynesians entreat the skinflint Republicans to loosen the purse strings so we can escape sub par growth. They advise Japan to spend itself out of permanent stagnation and welcome recent steps in this direction.

 


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The Greek Vote, Blame Germany, and the Forgotten Reforms

Greek, French and Egyptian voters went to the polls today. In what was supposed to be a turning point for Egyptian democracy, voters turned out in small numbers to cast their ballots for the Muslim or establishment candidate. They well understood the military had assumed control and the election was meaningless. In Europe, Greek voters remained evenly divided between the center-right and the Left, which promised to jettison the austerity of the Euro bailout agreement. Although preliminary results suggest that a pro-Euro coalition may achieve a fragile majority, it is sure that Greece will continue to muddle along from crisis to crisis. Europe needed clarity but got more confusion. The Greeks did not vote to leave the Euro, and no one wants to be responsible for pushing them out. Greek voters reckon that Europe will bail them out unconditionally rather than risk Greece’s departure from the Euro. Quite a gamble, but it may be a winning bet.

In France, electors gave their new socialist president Hollande a solid parliamentary majority to support his pro-stimulus and pro-welfare state policies. With two elections out of the way, attention turns tomorrow to Mexico where the G-20 leaders can pontificate and agree on general principles while deciding nothing.
Sunday’s votes took place against the drumbeat of blaming Germany for all that ails the Euro zone. If only the miserly, self-centered Germans would lend a helping hand to their deserving neighbors, all these troubles would go away. The blame-Germany narrative gives the weak European countries an excuse for not taking tough action, and the facts show that Germany’s stingy reputation is undeserved.

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Dr. Gregory's latest book can be found at Amazon.com.

To WSJ: Get the Headline Right: “Europe [Does Not] Delay Bailout Payment"

The WSJ headline reads: “Europe Delays Bailout Payment.” If you read the article, it says that the Eurozone lenders  released only 4.2 billion Euro instead of the agreed-upon 5.2 billion. The remainder, Eurozone governments threaten, will not be paid unless Greece forms a coalition government that will honor its austerity pact.  Remarkably the 4.3 billion covers the 3.3 billion Greece must pay next week. The slow drip-drip torture continues.

There is no way Greece can form a government that will adhere to its austerity agreements. The Eurozone leaders might as well bite the bullet now and save a few billion Euros.

It is time to recognize that the heart patient is terminal. There is nothing to be done short of a heart transplant of a blank check.

This Is The Point I Have Been Making About Greece

The Greek people not its technocrats will decide on austerity, and the Greeks do not like it.

  
               Cartoon from The Economist, Feb. 18-24, 2012
 
Caption: Merkel to Greek finance minister: "I'm afraid more belt tightening may be required." Finance minister: "Perhaps you'd like to tell him."

I Repeat Again: There Is Still No Greek Solution

The press is again full of reports that the troika (IMF, EU, and ECB) have reached an agreement on Greece. Markets will again rise, until they see that little has happened.

The troika has agreed to release a new tranche of rescue funds to stave off a March Greek default. Private lenders have agreed to their haircut (but that had really been decided a long time ago). The rescue funds will probably be doled out slowly to make sure that Greece meets its end of the bargain and cuts wages and public sector employment.

With an election coming up (and the public vehemently against outside intervention and austerity), Greece cannot meet its end of the bargain. Greece can only do so by agreeing to be governed by external bodies, such as the troika, which spells the end (temporarily perhaps) of Greece independence.

This is one of a hundred of steps that remain to be taken before we can say that Greece has been rescued.