More from Krugman

[Magox]

Krugman still wrong

 

 

Key takeaways:

 

 

For all the attention it has received, the Amherst researchers did not actually disprove Reinhart and Rogoff’s conclusion. Reinhart and Rogoff found that economies grew slower during periods of high debt (defined as government debt greater than 90 percent of GDP) than they did during times of lower debt.

The researchers from UMass, on the other hand, found that — wait for this — economies grew slower during periods of higher debt than they do during times of lower debt.

The UMass researchers did find a smaller difference in growth rates (one percentage point versus 1.3 points for the preferred median rates in Reinhart and Rogoff), but that hardly suggests that we are in dire need of more debt.

Besides, Reinhart and Rogoff’s model always provided a sort of faux precision to the debt argument. While the UMass researchers agreed that higher debt is correlated with lower growth, they found no evidence of Reinhart and Rogoff’s assertion that growth drops off dramatically above 90 percent of GDP. Did anyone really believe that debt equal to 89 percent of GDP was fine, while 91 percent of GDP sent the economy into a free fall? The point is that governments cannot amass an unlimited amount of liabilities without economic consequences.

Numerous studies besides Reinhart and Rogoff’s have shown this, including ones by the European Central Bank, the IMF, and the Bank for International Settlements. No doubt knaves and fools all.

Oh the horror, rather than 1.3% drop in growth, it's 1%.

 

 

Which brings us to the question of European “austerity.” Krugman continues to insist that European countries’ austerity has been devastating, and that spending cuts must therefore be resisted. The “case for keeping [the U.K] on the path of harsh austerity isn’t just empirically implausible, it appears to be a complete conceptual muddle,” he wrote this week, and “austerity policies have greatly deepened economic slumps almost everywhere they have been tried.”

But there have actually been few spending cuts in Europe, so it makes little sense to blame them for poor performance. A new study by Constantin Gurdgiev of Trinity College in Dublin compared government spending as a percentage of GDP in 2012 with the average level of pre-recession spending (2003–2007). Only three EU countries had actually seen a reduction: Germany, Malta, and Sweden. Not surprisingly, two of those three, Germany and Sweden, are among those countries that have best weathered the economic crisis. Those countries that have suffered most, Greece, Italy, Spain, and Portugal, have all seen spending increases.

And what about Great Britain, which has been Krugman’s No. 1 exhibit for the dangers of austerity? Compared with pre-recession levels, British government spending is up by 2.5 percent of GDP, a 29 percent increase in nominal spending.

Krugman belittles those who cite countries such as the Baltic nations or Switzerland, whose governments really have cut spending and seen robust economic recoveries. But how does he account for Iceland, considering he himself once called it “a post-crisis miracle?”

Iceland actually slashed spending from 57.6 percent of GDP in 2008 to 46.5 percent in 2012, a nearly 20 percent reduction. Yet, while Iceland was one of the countries hardest hit by the international banking crisis of 2008 and the recession that followed, the economy started growing rapidly again in 2010.

What most of Europe has seen in abundance is tax increases — exactly the sort of thing Krugman has advocated in the United States. In fact, overall, European countries have raised taxes by $9 for every $1 in spending cuts.

One might conclude that it was these tax hikes, rather than nonexistent spending cuts, that are responsible for Europe’s economic slowdown. Something to keep in mind the next time Paul Krugman — or President Obama, for that matter — calls for yet another tax hike on the rich.

None of this makes Krugman either a knave or a fool. But it does make him wrong.

 

Read more: http://www.realclearpolitics.com/articles/2013/05/09/krugmans_still_wrong_118323.html#ixzz2SpBdLse7

 

 

$9 in tax increases to $1 in cuts??? And they blame the cuts for their protracted slowdown????

 

[meazza]

 

$9 in tax increases to $1 in cuts??? And they blame the cuts for their protracted slowdown????

 

 

I have come to the conclusion that it is actually extremely difficult to ever actually successfully reduce spending.

 

The main issue for me is dissent. Last year we went through a "crisis" as the government wanted to increase tuition. What happened was 100 nights of protests. IIRC, the cost of policing the protests overshadowed any actual revenue increases that would have taken effect. Same thing in Europe. How do you want to successfully implement austerity when you're paying for 10X the normal police presence to keep the country from burning to the ground.