As far as Krugmans post, the mans politics is clouding up his economics so badly that he just sounds like a hack. (The Iraq war comment was a nice little jab, kudos to him. And the ‘German Hawk’ and ‘Ugly American’ titles speak well to the self styling liberal base to which Krugman writes. And if he has had so many conversations like that, why cant he quote it????? Or give an example? It is easy to make the other side sound stupid when you are the one putting words in their mouths.)
First off, the idea that Berlin is secretly trying to lower the value of the Euro to export more to the USA by doing exactly the opposit of what took out the Euro in the first place is delusional. The Euro is struggling because of national debts, Pure and simple. The fall of the Euro is traced directly to the implosion of Greece and the fears of similar in Spain, Portagal, Italy, Hungry and prob most of the smaller eastern nations on the euro. The fall of the Euro has nothing to do with a lack of European decifit spending, IT IS CAUSED BY PREVIOUS DEFICIT SPENDING. Why is that so hard to understand? The only way out is time and with it the gradual reduction of debt.
And the idea that because Germany CAN borrow at rock bottom rates means it should is just increadable. If this financial crisis has had ANY central theme, it is that debt doesnt matter till it does, and it is too late to do anything about it (cept beg for a bailout) once it does matter. Time and time again debt has taken out both countries and companies, and each and every one of them could borrow, until they couldnt. I dont care if it is housing, autos, national debt or corporate finance, just becuase you CAN borrow doesnt mean you SHOULD borrow.
[quote] almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity. [/quote]
On a side note, as far as I know economies almost never run at full capacity or near it, atleast for long. Now if he had said normal, then that would be a more defencable statement.
But my biggest problem with the Krugman argument is this:
We tend to think of recessions as the tradition inventory cycle type. Too much inventory builds up, causing reduced production, causing layoffs, which lowers demand and hence production, and the cycle continues to some natural low. His argument as I see it is that the government must step in at the beginning, before the cycle takes hold, and add to demand. This breaks the cycle and recessions either dont happen, or are very shallow and quick.
But this isnt a normal recession. It was debt and debt servicing that brought down the US housing market, the big banks, Greece, Iceland and perhaps the smaller EU nations and everyone else. There was plenty of demand at every step, rather the problem was excessive levels of debt, the cost of new consumption, and the inability of consumers/buyers to service that debt. Not demand.
And to his ‘answer’. It will take years more, ontop of the years already spent, to fix this DEBT crisis. Lets assume for a second that his solution works. Whole economies will have restructured to provide for large government demand. All the new jobs will be in government goods and service producing fields, or the industries they support, as that is where the demand is. Then, things finally get better, the recession ends and we begin to adress the deficit. Taxes go up, spending falls and demand colapses as the main driver of growth, governement spending, stops. Well then we get increasing unemployment, demand destruction, and a recession with alot more national debt to service from our reduced national revinues. JOB WELL DONE!
OR,
We just wind down these sectors over time, a far more expensive proposition than we currently discuss. Well, then we get slow growth, reducing employment growth in key areas, and far higher borrowing costs, which act just like a tax and reduce demand, leading to reduced demand which leads to rising unemployment which leads……
you can follow the rest.
The problem we have is that there is NO good solution to this problem. The sooner liberal bloggers can get that past their conscience and realize that, the better. We can either take our pain now, or kick the can into the future increasing the pain, with the added hope that some miracle saves our asses in the nick of time. I am not that faithful.
