FOREIGN POLICY JULY 10, 2010
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If repetition doesn’t improve the argument, try escalation. Paul Krugman, Princeton’s Nobel laureate-turned-columnist, has been haranguing the Europeans, and the Germans in particular, to drop their fiscal tightwad act: Don’t cut government spending, keep the deficits rolling. When Chancellor Angela Merkel ordered $ 100 billion in cuts and new taxes, Krugman warned her that she might end up worse off than Herbert Hoover—like Heinrich Brüning, Germany’s Reich chancellor from 1930 to 1932, “whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.“
That didn’t impress Merkel or her fellow Europeans, among them Nicolas Sarkozy of France and David Cameron of Britain. The French president imposed savings of $120 billion, and his British counterpart cut $190 billion (over the next several years). So Krugman escalated. If the “Great Depression” wouldn’t work, how about the “Long Depression” that American economists date from 1873 to 1896—a slew of panics and crashes bouncing back and forth across the Atlantic, interrupted only by weak growth. “We are now, I fear, in the early stages of a third depression,” which, according to the Cassandra of the New York Times op-ed page, will probably look like the nineteenth-century version.
How shall we count the ways in which the current phase is different from the Big D’s that tormented the nineteenth and twentieth centuries? Let’s start with the policies of governments. The folks who ran them back then didn’t know about macroeconomics, let alone about John Maynard Keynes, who taught us a few things about deficit spending. So the Hoovers and Brünings opted for austerity and zero deficits while their central banks turned off the money tap. Today, this is known as “pro-cyclical” policy, which deepens the slump.
As John Kenneth Galbraith, no deficit slouch he, put it with mild irony in his classic The Great Crash, 1929: Since then, “there has been a modest accretion of economic knowledge. A developing depression would not now be met with a fixed determination to make it worse.” In the fall of 2008, all governments—from Berlin to Beijing, with Washington in the lead—went into massive overspending from 3 to 5 percent of GDP. Today, the result is a double-digit U.S. shortfall that resembles Greece’s, and a German deficit approaching 6 percent, almost twice as much as permitted by the guardians of the euro.
The “fiscal orthodoxy” of the Europeans is anything but Brüning and Hoover rolled up into one. Good Keynesians, they’re merely reducing their astronomical deficits, not eradicating them. They intend not to slam on the brakes, but merely to ease up on the accelerator. It’s deep-red deficits as far as the eye can see.
What about the European Central Bank, the Fed’s counterpart? Tight money poisoned the fitful recovery during the L-Depression, and it triggered the G-Depression after the collapse of the Austrian Creditanstalt. Today, the world is awash in liquidity while interest rates remain at rock bottom, where they will stay.
Apart from a “modest accretion of economic knowledge,” there is the vast expansion of the modern welfare state. In the '30s, it was an embryo; in the nineteenth century, it still awaited conception, at least outside the Bismarck Reich. Today, even the United States boasts “automatic stabilizers,” such as unemployment benefits that rise in a recession, and social security benefits that deliver permanent incomes. In the most generous welfare states like Germany, public transfer payments of various kinds add up to one-third of GDP.
Above all, stimulus packages don’t deliver much stimulus. The U.S. will run a deficit of $1.5 trillion this year, and unemployment has hardly budged. If you want to know why, look at recent research like “New Keynesian Versus Old Keynesian Government Spending Multipliers,” by a team at Stanford (NBER Working Paper No. 14782) and at the data analyzed by Harvard’s Edward L. Glaeser.
Meanwhile, the new orthodoxy of the White House (“spend, spend, spend”) is beginning to crack, as Obama’s political advisers urge the President to listen not to Krugman, but to the rising public anger about deficits. Maybe Mr. Obama should also keep in mind his Grand Guru Keynes who wrote in his laborious prose in 1937: “Just as it is advisable for the Government to incur debt during the slump, so for the same reason it is now advisable that they should incline to the opposite policy.”
Josef Joffe is editor of Die Zeit and a senior fellow of the Institute for International Studies, and an Abramowitz Fellow at the Hoover Institution, at Stanford.
11 comments
Please see http://www.eurointelligence.com/article.581+M5a44f3fb3ec.0.html for a strong counterpoint to Mr. Joffe's article.
- stm681
July 10, 2010 at 8:27am
The name of Dr. Glaeser's piece is "What We Don't Know, And Perhaps Can't", not "Krugman Is Full Of B.S." As Glaeser says, "I’m not suggesting that spending did or didn’t reduce unemployment; I am asserting that we can’t tell anything with any degree of certainty...Recessions aren't that common, and there are too many moving parts."
- wamba1
July 10, 2010 at 11:48am
Not only are recessions not that common, but recessions initiated by fiscal crises are even less common. This one is our first since the '30s. As for the effect of the federal stimulus, it was obviously blunted, if not entirely offset, by the sharp contraction of spending at the state and local levels. It's not reasonable to assess the federal stimulus in isolation.
- acbrod
July 10, 2010 at 1:50pm
What seems perpetually off the table for neo-classical/monetarist economists is keeping the deficit down with high-end taxes that would have a minimal adverse effect on consumption. Take the money from the highest earners and spend it for them. The recession will end sooner rather than later. Those who are already spending their entire income cannot be the drivers of new spending. The credit isn't there and largely shouldn't be to support personal deficit spending. You avoid deficit spending by having the spending come from those who are not in deficit. Not that complicated, just ideologically anathema to the plutocrats and their economist lapdogs.
- roidubouloi
July 10, 2010 at 3:33pm
«Good Keynesians, they’re merely reducing their astronomical deficits, not eradicating them. They intend not to slam on the brakes, but merely to ease up on the accelerator. It’s deep-red deficits as far as the eye can see.» Exactly. Perhaps this doesn't suit the interests of America's "financial industry" eager to lend printed dollars at high interests, increasing them at the worst moment backed by their "independent" rating agencies. Cutting deficits means for Europe a declaration of independence from international investment banks and rating agencies. If it doesn't suit American interests (with its 40% GDP made of thin air, i.e., financial "industry"), they should have thought about it when they allowed for their banks and ratings to launch a speculative attack on Southern Europe. And at that moment, Krugman was making jokes on his blog... Germans, of course, were the only ones ready to help while all others were "betting against the Euro". But of course they saw that this kind of European vulnerability before international finance was not acceptable. And the only way out was and is austerity.
- Ideaot
July 11, 2010 at 3:39am
The West has enjoyed robust growth in living standards for so long, maybe it's a good idea to slow down or even retreat for awhile. Because that's what is happening. The cliche that a rising tide lifts all boats has played out both here and in Europe, supporting our own predisposition for little in the way of re-distribution and in Europe mitigating the costs for re-distribution for those in the upper quartiles. It's no coincidence that European governments adopted cuts in social programs just when the tide ebbed, as those who would be required to pay in a no-growth economy voiced their displeasure loud and clear. As everybody knows, growth in living standards in the West and elsewhere has depended in large measure on the American consumer, without which the tide will ebb taking those boats downward with it. Is that a good thing? Could be. But the transition from a high growth to low growth economy will be painful, especially for those in the bottom quartiles and the governments who must confront their anger.
- rayward
July 11, 2010 at 8:38am
Whatever the level of growth, we need full employment or the society will crumble. We cannot have a permanent unemployed underclass barely scraping by, if that, and expect to keep what we have.
- roidubouloi
July 11, 2010 at 9:42am
I am not a mystic, nor a religious believer. However, it is strange how history seems to repeat patterns in strange spiraling cycles. Whether we call it the "2nd Great Depression" or just a "Great Recession," we are going through something similar to what my parents were shell-shocked by in the 1930s. Consider, the credit crash, the real estate crash, the people who have accepted unemployment for months turning into years, the bankruptcy of states, whether California or Greece. Consider other strange social parallels. Just one of many: we had Prohibition of alcohol, removed fairly expeditiously. We had prohibition of marijuana, dragging on for decades, and now being slowly repealed in the name of medicine. The original Prohibition led to widespread defiance of the law, growth of organized crime and leaders such as Al Capone, and violence such as the St. Valentine's Day Massacre. Shall we talk about Columbia, Afghanistan (just to name a couple of the many violent places embroiled with drug smuggling and violence) and now the astonishingly brutal drug war violence in Mexico and spreading into the United States?
- skahn
July 12, 2010 at 12:38am
I am sure Mr. Joffe is not worrying about where his next meal is coming from or where he might be able to find a pair of shoes for his little ones, if he has them -- this entire argument is being made by men for the most part who do not and have not suffered from the devastating effect of the current downturn. From whatever place their arguments arise they are not suffering at all, and therefore I find most of what they say part of the continuing nonsense of wealthy prognosticators largely by their tone suggesting that it is OK for millions of people to remain out of work without any supplemental help while the 'economic' minds who didn't have the restraint to suspect all this would happen in the first place, to continue ignoring their suffering -- or suggesting that their suffering is Ok as long as the country resolves it's deficits. Who can be honestly serious about the condition of their grandchildren in the coming century but people who have the means to live through the coming years without fiscal worries? Let's stop listening to lunatics who sound rational and want us to believe it is alright for hardworking Americans to get by on food stamps and no employment, while they continue to stoke our fears of deficits to come in a future when those who are suffering will have died from their lack of concern and our continuing belief in their selfish, abstract and careless prognostications.
- chadama
July 12, 2010 at 10:34am
Yes!, chadama.
- roidubouloi
July 12, 2010 at 1:32pm
A note to those who bizarrely use the term 'Cassandra' as a pejorative: Kassandra, a legendary ancient Trojan war era prophetess and priestess of Apollo, made predictions which, due to a curse, were NEVER BELIEVED, but ALWAYS CAME TRUE. To call someone a Cassandra is to stipulate the truth of their predictions.
- Curran1
July 12, 2010 at 6:28pm