• This is a political forum that is non-biased/non-partisan and treats every person's position on topics equally. This debate forum is not aligned to any political party. In today's politics, many ideas are split between and even within all the political parties. Often we find ourselves agreeing on one platform but some topics break our mold. We are here to discuss them in a civil political debate. If this is your first visit to our political forums, be sure to check out the RULES. Registering for debate politics is necessary before posting. Register today to participate - it's free!

Pau Krugman's austerity predictions aren't aging well.

KLATTU

KLATTU

Banned
DP Veteran
Joined
Jan 2, 2013
Messages
19,259
Reaction score
6,899
Gender
Undisclosed
Political Leaning
Conservative
Paul Krugman’s Predictions about “Austerity” Aren’t Aging Well - Foundation for Economic Education

But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.

Britain, Krugman’s “demonstration that the Austerians had it wrong,” has, in fact, shown the opposite.

The Conservative government implemented a program of budget cuts. Over a 5-year period exogenous fixed measures amounted to almost three percent of GDP, two-thirds expenditure cuts, and one-third tax hikes. It was harshly criticized by the IMF, which predicted a major recession. The latter did not materialize and the IMF later publicly apologized. The UK grew at respectable rates.

comments welcome.
 
Perhaps Krugman should return his Nobel Prize.
 
KLATTU said:
Paul Krugman’s Predictions about “Austerity” Aren’t Aging Well - Foundation for Economic Education

But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.

Britain, Krugman’s “demonstration that the Austerians had it wrong,” has, in fact, shown the opposite.

The Conservative government implemented a program of budget cuts. Over a 5-year period exogenous fixed measures amounted to almost three percent of GDP, two-thirds expenditure cuts, and one-third tax hikes. It was harshly criticized by the IMF, which predicted a major recession. The latter did not materialize and the IMF later publicly apologized. The UK grew at respectable rates.

comments welcome.
Click to expand...

A more sensible, much less partisan assessment of that book:

Has Austerity Been Vindicated? by Robert Skidelsky - Project Syndicate
 
KLATTU said:
Sounds like you don't know what you are talking about.
"Founded in 1946, FEE was the first modern think tank established in the United States specifically to promote, research and promulgate free market and libertarian ideas."
Click to expand...

Looks like I know exactly what I'm talking about per your own quote.

It's a think tank designed to promote, research and promulgate free market and libertarian ideas; it is thus absolutely a partisan, politically charged entity.
 
Let's all take the wayback machine to early 2009, when the WSJ, the Austrians, and the other usual suspects were screaming about soaring rates and runaway inflation. Those, like Krugman, who understood IS-LM [IS-LM stands for investment-savings, liquidity-money] were predicting that interest rates would stay low and that even a tripling of the monetary base would not be inflationary. Events since then have been a huge a vindication for the IS-LM types, including Krugman.

I read the OP's article, it appears to me to be a mixture of revisionist history and misrepresenting Krugman. The part about the "Confidence Fairy" isn't even explained properly. The term comes this column, nine years ago:
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.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.
Click to expand...

What the argument was for austerity back then was that unless the U.S. controls its debt, these bond vigilantes will stop buying U.S. debt because they will lose confidence. This would in turn drive U.S. debt to high levels and cause hyperinflation and debase the dollar. Well, what happened? The U.S. issue a large amount of debt. Investors were willing to buy U.S. debt at zero interest and the none of the gloom that the austeritans claimed would happen, happened.
And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk. Other good soldiers, like Latvia and Estonia, have done even worse — and all three nations have, believe it or not, had worse slumps in output and employment than Iceland, which was forced by the sheer scale of its financial crisis to adopt less orthodox policies.
Click to expand...

Instead, the U.S. economy grew because of actual expansionary policies, while the European economies that believed in austerity didn't have the growth until years later. Yes, contractionary policy is contractionary.

The last ten years are a complete vindication of Krugman and other Keynesians.
 
KLATTU said:
comments welcome.
Click to expand...

The Bank of England's base rate is still less than 1%, or 0.75%.

What about the inflation, dollar debasement, debt spiral, etc... that was predicted by economic pundits right-of-center that did not materialize? Hell, there are multiple posters in this thread that warned and predicted this very thing.
 
Kushinator said:
The Bank of England's base rate is still less than 1%, or 0.75%.

What about the inflation, dollar debasement, debt spiral, etc... that was predicted by economic pundits right-of-center that did not materialize? Hell, there are multiple posters in this thread that warned and predicted this very thing.
Click to expand...
And none of those making those predicts have admitted that they were wrong. In fact, one of them is now the Director of the National Economic Council in the White House.

The author of that article talks about the 1930s debate between Keynes vs Hayek. Hayek argued that deficits somehow caused the Great Depression and deficit spending would drive up interest rates and make the Depression worse. It's easy to research that the deficits came after the depression started, not before. Truly, nothing ever changes. The insistence that big deficits somehow caused the crisis even thought they actually didn’t appear until after the crisis was well underway. These are exactly the same arguments that were made in 2009, as those Hayek was making in 1932, except that they’re less coherent. In the real world, deficits mainly result from the slump, not the cause, and interest rates did not rise in the face of those slump-caused deficits -- in 1932 nor in 2009.
 
KLATTU said:
Paul Krugman’s Predictions about “Austerity” Aren’t Aging Well - Foundation for Economic Education

But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.

Britain, Krugman’s “demonstration that the Austerians had it wrong,” has, in fact, shown the opposite.

The Conservative government implemented a program of budget cuts. Over a 5-year period exogenous fixed measures amounted to almost three percent of GDP, two-thirds expenditure cuts, and one-third tax hikes. It was harshly criticized by the IMF, which predicted a major recession. The latter did not materialize and the IMF later publicly apologized. The UK grew at respectable rates.

comments welcome.
Click to expand...

First, austerity should be a point that no country has to reach because they should keep their economy under control so that austerity never needs to be considered. Once that point has been reached, austerity of some type is necessary, but it is kind of like surgery in that you have to be precise with the austerity. If the surgeon is reckless and cuts too deep, the patient could die.
 
Moderate Right said:
First, austerity should be a point that no country has to reach because they should keep their economy under control so that austerity never needs to be considered. Once that point has been reached, austerity of some type is necessary, but it is kind of like surgery in that you have to be precise with the austerity. If the surgeon is reckless and cuts too deep, the patient could die.
Click to expand...
From an economic view, austerity is only appropriate during boom times, not recessions. Cutting government spending during recessions makes the recessions deeper.
 
KLATTU said:
Paul Krugman’s Predictions about “Austerity” Aren’t Aging Well - Foundation for Economic Education

But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.

Britain, Krugman’s “demonstration that the Austerians had it wrong,” has, in fact, shown the opposite.

The Conservative government implemented a program of budget cuts. Over a 5-year period exogenous fixed measures amounted to almost three percent of GDP, two-thirds expenditure cuts, and one-third tax hikes. It was harshly criticized by the IMF, which predicted a major recession. The latter did not materialize and the IMF later publicly apologized. The UK grew at respectable rates.

comments welcome.
Click to expand...

I'm starting to think Krugman got his Nobel Prize the same way Obama got his.
 
MTAtech said:
From an economic view, austerity is only appropriate during boom times, not recessions. Cutting government spending during recessions makes the recessions deeper.
Click to expand...

No country should ever let themselves get to the point where they ever need to do austerity. Recession doesn't really have much to do with it. You need to do austerity when your debt to GDP ratio is too high, whether it is good times or bad times. And, if you are in recession at the time, the austerity has to be a surgical process. You have a closed mind on the subject because you can't think outside the box. There are all kinds of austerity and levels of it.
 
Moderate Right said:
No country should ever let themselves get to the point where they ever need to do austerity. Recession doesn't really have much to do with it. You need to do austerity when your debt to GDP ratio is too high, whether it is good times or bad times. And, if you are in recession at the time, the austerity has to be a surgical process. You have a closed mind on the subject because you can't think outside the box. There are all kinds of austerity and levels of it.
Click to expand...

I don't think you will find economists agreeing with that action. When the economy is in a recession, the objective is to reduce unemployment and get out of the recession. Cutting spending (austerity) lowers GDP and negatively effects employment. That makes the recession worse.

Alternately, not worrying about the debt to GDP ratio -- especially when a country has a sovereign currency, is secondary. Thus, large government spending lowers unemployment, as government becomes the demand of last resort, and results in more people paying taxes -- which increases government revenues and also reduces expenditures -- like unemployment insurance, SNAP and Medicaid -- thus, strengthening the debt to GDP ratio.
 
MTAtech said:
I don't think you will find economists agreeing with that action. When the economy is in a recession, the objective is to reduce unemployment and get out of the recession. Cutting spending (austerity) lowers GDP and negatively effects employment. That makes the recession worse.

Alternately, not worrying about the debt to GDP ratio -- especially when a country has a sovereign currency, is secondary. Thus, large government spending lowers unemployment, as government becomes the demand of last resort, and results in more people paying taxes -- which increases government revenues and also reduces expenditures -- like unemployment insurance, SNAP and Medicaid -- thus, strengthening the debt to GDP ratio.
Click to expand...

Greece did austerity and is now better off, not to mention several other countries. It depends on how you do it.

You don't think outside the box. All you can think is, "Recession, austerity bad". My main point is that countries need to make sure they never get to the point of needing austerity but watching their debt vs gdp ratio. If you are responsible then you never need austerity. That's the goal, never needing it. Greece and other countries got out of control, forcing austerity.
 
Moderate Right said:
Greece did austerity and is now better off, not to mention several other countries. It depends on how you do it.

You don't think outside the box. All you can think is, "Recession, austerity bad". My main point is that countries need to make sure they never get to the point of needing austerity but watching their debt vs gdp ratio. If you are responsible then you never need austerity. That's the goal, never needing it. Greece and other countries got out of control, forcing austerity.
Click to expand...

Read the first sentence in the second paragraph: "Alternately, not worrying about the debt to GDP ratio -- especially when a country has a sovereign currency, is secondary." Greece doesn't have a sovereign currency. It was uses the Euro, which it can't control. The cost of Greece's austerity was considerable. It endured a decrease in output. So, if the austerity was necessary, so was the depression-level slump -- a slump that left Greece's debt ratio far higher after 5 years of hell than it was when the program began.

Nobody is saying that a country can't recover after austerity. It's just that the austerity and pain just isn't worth it. Having a sovereign currency and expanding the money supply is a much better tool.
 
MTAtech said:
Read the first sentence in the second paragraph: "Alternately, not worrying about the debt to GDP ratio -- especially when a country has a sovereign currency, is secondary." Greece doesn't have a sovereign currency. It was uses the Euro, which it can't control. The cost of Greece's austerity was considerable. It endured a decrease in output. So, if the austerity was necessary, so was the depression-level slump -- a slump that left Greece's debt ratio far higher after 5 years of hell than it was when the program began.

Nobody is saying that a country can't recover after austerity. It's just that the austerity and pain just isn't worth it. Having a sovereign currency and expanding the money supply is a much better tool.
Click to expand...

Oh Jeeeeeeeeeeeesus. Now you are quoting MMT, which is complete nonsense. It is only a THEORY, not accepted by all of mainstream economists.
 
Moderate Right said:
Oh Jeeeeeeeeeeeesus. Now you are quoting MMT, which is complete nonsense. It is only a THEORY, not accepted by all of mainstream economists.
Click to expand...
I think you are confusing MMT with standard Keynesian economics.

Both MMT and Keynesians hold the premise that modern governments are able to issue fiat money in great amounts. MMT believes that they can’t go bankrupt and therefore can issue unlimited amounts. Keynesians understand that the premise is only valid if investors are willing to buy their bonds. The distinction was irrelevant in the discussion of the Great Recession, where investors were not only willing to lend our government money at zero interest but for a time was willing to pay the government for the privileged of borrowing their money -- a negative interest rate.
 
jmotivator said:
Source watch is ad hominem for lazy people.
Click to expand...

Beyond making clear the obvious bias of FEE (which is already oozing in the article no less), I provided an alternate analysis from a source that has superior qualifications and expertise versus the FEE writer, and rightly points out that correlation is not causation when dissecting those few instances where austerity appeared to work, as there are likely other extenuating circumstances.

One claims to know and assert that austerity in those minority of situations, beyond reasonable doubt, was responsible for growth (FEE) based on the analysis from the book, while the other takes up the clearly more objective and scientific position that there is not enough information to tell, pointing out the peer backlash the same lead author received over sloppy econometrics and unsupported conclusions in the past:

Robert Skidelsky said:
"Alesina’s previous work in this area with Silvia Ardagna was criticized by the International Monetary Fund and other economists for its faulty econometrics and exaggerated conclusions. And this new book, which analyzes 200 multi-year austerity plans carried out in 16 OECD countries between 1976 and 2014, will also no doubt keep the number crunchers busy.

But that is not the main point. Correlation is not causation. The association of fiscal retrenchment and economic growth tells us nothing about the underlying relationship between the two. Does shrinking the deficit cause economic growth, or does growth cause the deficit to shrink? All the econometrics in the world cannot prove that one caused the other, or that both may not be the result of something else. There are simply too many omitted variables – that is, other possible causes of either or both outcomes. So-called statistical proofs always start with a theory of causation, to which the data are “fitted” to get the result the theorist wants."
Click to expand...
 
Last edited:
MTAtech said:
I think you are confusing MMT with standard Keynesian economics.

Both MMT and Keynesians hold the premise that modern governments are able to issue fiat money in great amounts. MMT believes that they can’t go bankrupt and therefore can issue unlimited amounts. Keynesians understand that the premise is only valid if investors are willing to buy their bonds. The distinction was irrelevant in the discussion of the Great Recession, where investors were not only willing to lend our government money at zero interest but for a time was willing to pay the government for the privileged of borrowing their money -- a negative interest rate.
Click to expand...

Doesn't change anything I said. You seem to consistently ignore my point that countries should watch their debt to gdp ratio and not ever let themselves get into a position where austerity is needed.
 
Surrealistik said:
Beyond making clear the obvious bias of FEE (which is already oozing in the article no less), I provided an alternate analysis from a source that has superior qualifications and expertise versus the FEE writer, and rightly points out that correlation is not causation when dissecting those few instances where austerity appeared to work, as there are likely other extenuating circumstances.

One claims to know and assert that austerity in those minority of situations, beyond reasonable doubt, was responsible for growth (FEE) based on the analysis from the book, while the other takes up the clearly more objective and scientific position that there is not enough information to tell, pointing out the peer backlash the same lead author received over sloppy econometrics and unsupported conclusions in the past:
Click to expand...

So what you are saying is that Source Watch is a one stop shop for people who would rather claim a person's perceived bias than challenge them on the merits of their actual argument?

Yeah, that is totally different than ad hominem for lazy people. :roll:
 
jmotivator said:
So what you are saying is that Source Watch is a one stop shop for people who would rather claim a person's perceived bias than challenge them on the merits of their actual argument?

Yeah, that is totally different than ad hominem for lazy people. :roll:
Click to expand...

What I'm saying is that whether or not you want to acknowledge the blatant, seething bias of the FEE author which should immediately subject his assessment to greater scrutiny (rather than being taken at face value like so many pro-Austerity cultists have, seeking to confirm their own biases), his conclusions and premise are pretty obviously wrong for the reasons stated by Robert Skidelsky.
 
You must log in or register to reply here.
Back
Top Bottom