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2010-06-18

Krugman's right economics at the wrong time

Comments on Paul Krugman “That ’30s Feeling”, 17/06/2010, http://www.nytimes.com/2010/06/18/opinion/18krugman.html

What Krugman argues is probably the right economics but at the wrong time.

Maybe the relationship between the cost and benefit (or perceived or expected ones) of government spending and the government debt level is non-linear.

When government debt gets too big, the costs of a further increase are likely to be greater.

That is certainly how it works for the private sector.

Government is a little different and a government has more room to move, but it is likely to have some limits.

PS: This is what Krugman argues:
"Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.
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