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Krugman’s Still Wrong: He’s doing a victory lap, but shouldn’t be.
National Review ^ | 05/08/2013 | Michael Tanner

Posted on 05/08/2013 7:49:58 AM PDT by SeekAndFind

Paul Krugman has never been shy about proclaiming that he is right and everyone else is wrong — and not just wrong, but “knaves and fools.” Lately, however, one begins to worry that he might actually hurt himself, so vigorously has he been patting himself on the back for his opposition to “austerity” (defined as any cut in government spending, anytime, anywhere).

On his latest victory lap, Krugman is celebrating two things. First, a group of researchers from the University of Massachusetts Amherst discovered a small error in a widely cited paper by Carmen Reinhart and Ken Rogoff that showed economic growth was lower in countries with higher debt loads. Many of those who favor reduced government spending (including me) have cited Reinhart and Rogoff positively. Therefore, Krugman declares, the entire idea of austerity has been “sold on false pretenses.”

Second, European economies have sputtered. Krugman blames this on sharp spending cuts, which would be the opposite of the Keynesian stimulus spending that he favors. If only European governments had listened to him, Krugman suggests, instead of to all those knaves and fools, and spent more, their economies would be humming along by now.

Professor Krugman should pause briefly from congratulating himself to take a look at a few unfortunate facts. Let’s deal with the Reinhart and Rogoff kerfuffle first.

For all the attention it has received, the Amherst researchers did not actually disprove Reinhart and Rogoff’s conclusion. Reinhart and Rogoff found that economies grew slower during periods of high debt (defined as government debt greater than 90 percent of GDP) than they did during times of lower debt.

The researchers from UMass, on the other hand, found that — wait for this — economies grew slower during periods of higher debt than they do during times of lower debt.

The UMass researchers did find a smaller difference in growth rates (one percentage point versus 1.3 points for the preferred median rates in Reinhart and Rogoff), but that hardly suggests that we are in dire need of more debt.

Besides, Reinhart and Rogoff’s model always provided a sort of faux precision to the debt argument. While the UMass researchers agreed that higher debt is correlated with lower growth, they found no evidence of Reinhart and Rogoff’s assertion that growth drops off dramatically above 90 percent of GDP. Did anyone really believe that debt equal to 89 percent of GDP was fine, while 91 percent of GDP sent the economy into a free fall? The point is that governments cannot amass an unlimited amount of liabilities without economic consequences.

Numerous studies besides Reinhart and Rogoff’s have shown this, including ones by the European Central Bank, the IMF, and the Bank for International Settlements. No doubt knaves and fools all.

More important, however, debt has never been the most important measure of government’s burden on the economy. As Milton Friedman pointed out, the real burden of government is spending, regardless of whether that spending is financed through debt or taxes. Too much debt is clearly bad, but substituting taxes for the debt does not make the problem substantially better.

Which brings us to the question of European “austerity.” Krugman continues to insist that European countries’ austerity has been devastating, and that spending cuts must therefore be resisted. The “case for keeping [the U.K] on the path of harsh austerity isn’t just empirically implausible, it appears to be a complete conceptual muddle,” he wrote this week, and “austerity policies have greatly deepened economic slumps almost everywhere they have been tried.”

But there have actually been few spending cuts in Europe, so it makes little sense to blame them for poor performance. A new study by Constantin Gurdgiev of Trinity College in Dublin compared government spending as a percentage of GDP in 2012 with the average level of pre-recession spending (2003–2007). Only three EU countries had actually seen a reduction: Germany, Malta, and Sweden. Not surprisingly, two of those three, Germany and Sweden, are among those countries that have best weathered the economic crisis. Those countries that have suffered most, Greece, Italy, Spain, and Portugal, have all seen spending increases.

And what about Great Britain, which has been Krugman’s No. 1 exhibit for the dangers of austerity? Compared with pre-recession levels, British government spending is up by 2.5 percent of GDP, a 29 percent increase in nominal spending.

Krugman belittles those who cite countries such as the Baltic nations or Switzerland, whose governments really have cut spending and seen robust economic recoveries. But how does he account for Iceland, considering he himself once called it “a post-crisis miracle?”

Iceland actually slashed spending from 57.6 percent of GDP in 2008 to 46.5 percent in 2012, a nearly 20 percent reduction. Yet, while Iceland was one of the countries hardest hit by the international banking crisis of 2008 and the recession that followed, the economy started growing rapidly again in 2010.

What most of Europe has seen in abundance is tax increases — exactly the sort of thing Krugman has advocated in the United States. In fact, overall, European countries have raised taxes by $9 for every $1 in spending cuts.

One might conclude that it was these tax hikes, rather than nonexistent spending cuts, that are responsible for Europe’s economic slowdown. Something to keep in mind the next time Paul Krugman — or President Obama, for that matter — calls for yet another tax hike on the rich.

None of this makes Krugman either a knave or a fool. But it does make him wrong.

— Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.


TOPICS: Business/Economy; Constitution/Conservatism; Culture/Society; News/Current Events
KEYWORDS: debt; krugman; paulkrugman; spending

1 posted on 05/08/2013 7:49:58 AM PDT by SeekAndFind
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To: SeekAndFind

Spending our way to prosperity.

Though I doubt if the majority of economists today even understand the concept of “prosperity”. The velocity of money (one of the vital components of its value) has slowed to a pace that is, at its person-to-person rate, to almost the levels of the Great Depression, even though vastly greater numbers of currency units are now in circulation.


2 posted on 05/08/2013 8:03:52 AM PDT by alloysteel (The only function of economic forecasting is to make astrology look respectable.-J. K. Galbraith)
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To: SeekAndFind

The Krugpigtroll’s suggestion for stimulating the economy is to prepare for an alien invasion. Oh! And don’t forget he says breaking windows is also good for the economy! What are you waiting for?! Get to smashing glass and kicking alien a....


3 posted on 05/08/2013 8:07:37 AM PDT by Casie (democrats destroy)
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To: SeekAndFind

The Cato Institute does some amazing work


4 posted on 05/08/2013 8:08:13 AM PDT by Mr. K (There are lies, damned lies, statistics, and democrat talking points.)
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To: Mr. K

RE: The Cato Institute does some amazing work

They are however, at odds with the Heritage Foundation when it comes to the issue of immigration.


5 posted on 05/08/2013 8:08:52 AM PDT by SeekAndFind
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To: FReepers

Click The Pic

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible: avoiding occasions of expence by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expence, but by vigorous exertions in time of Peace to discharge the Debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burthen which we ourselves ought to bear.

George Washington

6 posted on 05/08/2013 8:47:42 AM PDT by DJ MacWoW (My faith and politics cannot be separated)
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To: alloysteel
Which might well be the explanation for the "black hole" of trillions of dollars and other currencies being shoveled into cyberspace by the world's central bankers without apparent effect, or at least without inflationary effect commensurate with the amount of stimulation.

In other words, without velocity no recovery except in the stock market. But that does not mean that there will not come in terms of inflation a day of reckoning, it merely tells us that it is postponed. Meanwhile, we have the model of Japan which tells us we might be facing decades of stagnation.

Now we know why it is called the dismal science.


7 posted on 05/08/2013 8:55:24 AM PDT by nathanbedford ("Attack, repeat, attack!" Bull Halsey)
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To: SeekAndFind
his opposition to “austerity” (defined as any cut in government spending, anytime, anywhere).

This belief is an example of being motivated by immediate interests rather than by true interests. A decrease in government spending may reduce aggregate demand in the short run, but in the long run, a balanced budget combined with reduced taxes and reduced government borrowing, and a stable money supply would achieve the vital goal of increasing saving and capital formation, which leads to capital accumulation, which leads to economic progress and prosperity and lower prices and higher standard of living for the average wage earner.

The failure to reduce government spending on the other hand, makes the achievement of greater saving and capital formation either altogether impossible or possible only at the price of sacrificing the freedom of the mass of wage and salary earners to dispose of their own incomes.

8 posted on 05/08/2013 9:22:48 AM PDT by mjp ((pro-{God, reality, reason, egoism, individualism, natural rights, limited government, capitalism}))
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To: SeekAndFind

First of all, he’s wrong because that’s not what “austerity” means. (Either he knows it, in which case he’s completely dishonest, or he doesn’t, in which case he’s unqualified to be writing about the subject.)

Second, he’s wrong for the simple reason that spending has not been cut; it’s gone up every year. It’s just going up a bit less than projected.

Third, aren’t partisans like Krugman (Krugperson?) supposed to be praising Obama’s great economy, not patting themselves on the back for predicting it would be rotten?


9 posted on 05/08/2013 9:27:16 AM PDT by TBP (Obama lies, Granny dies.)
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To: TBP
… partisans like Krugman (Krugperson?)

Krugperbeing

10 posted on 05/08/2013 10:17:09 AM PDT by ShorelineMike (Constituo, ergo sum.)
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