Krugman: Two Imaginary Creatures Dominating The Discussion On Austerity


Paul Krugman discussed his recent article in the New York Times with GPS's Fareed Zakaria about why the deficit hawks are dead wrong on the path our country needs to take to get the economy back on track. It's too bad Krugman isn't a member of that deficit commission instead of wingnuts like Alan Simpson. I'd feel like they were sincere in trying to get our economy out of the ditch instead of using the problems we're having as an excuse to destroy Social Security and Medicaid and what's left of our middle class.

For "balance" Zakaria followed this interview with deficit hawk Niall Ferguson. In the end even Zakaria admitted that there is a strong case for short term government spending, not that the Republicans and the Ben Nelsons of the world are going to allow it.

Myths of Austerity:

When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions.

Which brings me to the subject of today’s column. For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy. Read on...

Transcript via CNN below the fold.

ZAKARIA: When - when you look at Europe, you think that the Europeans -- you think the British government is doing exactly the wrong thing because they're going down this - this path of austerity, cutting spending, raising taxes. But what they say, I think, is, look we don't know when this - you know, this - this wheel will turn. We are in a situation where our borrowing costs could go up so dramatically that it makes it impossible for us to do anything.

KRUGMAN: I have been thinking about this in terms of there are two imaginary creatures who are dominating the discussion. There's the - the invisible bond vigilante and the invisible austerity fairy, or the confidence fairy, I guess I would call him.

The - the invisible bond vigilante is the hypothetical investor who any day now is going to turn on you and - and drive up your borrowing costs if you don't slash - if you don't cancel all notions of stimulus and - and so on, and everyone points to Greece, which - you know, but Greece is a very special situation.

Look at Germany or the United States or Britain, and the bond vigilantes are invisible. As of -

ZAKARIA: In other words, they can borrow quite cheaply.

KRUGMAN: That's right. U.S. interest rates have actually been dropping. The 10-year bond rate in the U.S. has fallen from 3.9 a few months ago to 2.9 now. And one of the things you notice is that in press reporting, every little uptick of interest rates is reported as ah, the markets have lost confidence and then, you know, it's like those Victorian photographs of fairies that - that weren't really there.

The fact of the matter is there's no sign of this happening, and it actually shouldn't be happening because for the reasons we talked about a few minutes ago, what you spend on stimulus right now has almost no bearing on your long-run fiscal prospects.

ZAKARIA: But - but just stay with that for a second because Greece didn't have trouble nine months ago.


ZAKARIA: In other words, are people not right in worrying about what economists call tail risk, that is the small probability of a high-impact event? Isn't that what the financial crisis taught us, that when things are out of whack you don't know when the things will turn, but they can turn pretty fast.

KRUGMAN: But why should they turn on the basis of spending that has almost no bearing on your long run prospects? I would say even in the case of Greece what matters was not the spending they did in 2009, what mattered was the realization that the long-run budget position is basically unsustainable.

What we do, cutting out on - failing to pass unemployment benefits for the United States now is not going to rescue us if the markets believe that we are not going to do the big things on Medicare and revenue that are going to be necessary for the long run.

So it's - yes, it's fine to believe that something terrible could happen, but it's a pure imputation of - of motives for which there's no evidence to believe that - that spending on the economy right now is going to make the difference.

ZAKARIA: Well, I've spoken to a businessman and I was trying to put forward, you know, the Krugman view, and he said - which, you know, in some ways he thinks is also the administration view and he said look, the problem here is that what these guys are trying to, do the Keynesians, the people who want to spend more money, is they're trying to reflate the economy and - and pump it back up to where it was in 2005, 2006, 2007, but that was all unsustainable.

You're - you're sort of trying to stop these mortgages from being foreclosed but people had bought houses they couldn't pay for. You're trying to somehow get people borrowing again, but they were borrowing too much. Why are you trying to, you know, re -- sort of pump back up an unsustainable situation?

These - you know, these people, these companies should be coming back down to more manageable levels of debt, and that's going to take a while.

KRUGMAN: But why should lots of perfectly good, productive capacity and millions of perfectly productive workers who have things to do that we all need be left unemployed while we do that adjustment?

I - I certainly believe we're not going to restore - housing prices are not going back to where they were. We're not going to -

Some of those - some of those ghost developments, both of office buildings and of houses, are going to be abandoned. They're never going to be used.

But why should we have mass unemployment of schoolteachers, of automotive workers, of - you know, of all these parts of the economy that had nothing to do with the bubble but are now caught up in the tailspin as the economy suffers the aftermath of the bubble? Why should those people be left unemployed?

ZAKARIA: You realize that there is right now very little political prospect of your recommendations being enacted?

KRUGMAN: Right. I don't expect to win this debate on policy this month, but I'm hoping that over the course of a year or two that - that we can hope to at least - at least make policy less awful than it would otherwise be.

ZAKARIA: Make policy less awful than it would be. That's a - that's ringing cry to the battlements.

KRUGMAN: Well, hey, I'm an economist, right? They don't call it the dismal science for nothing.

But, no, I mean, this is - and - and also, I think there's a question you just have to - let's get this - let's get the story of what - what had just happened right. What we just had was a kind of hysteria among the policy elite in which - in which based on really no evidence, based on arguments that don't hang together as soon as you do even a bit of the arithmetic, we've had this rush for the exits on - on helping economies in need.

And we need to know that. We need to understand what - that what happened was not a judicious response or - and certainly not something that was forced on us by the - by the real economic environment but instead a bad decision.

ZAKARIA: Paul Krugman, pleasure to have you on.

KRUGMAN: Good to be on.

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