Krugman’s blog, 6/19/15

There were three posts yesterday.  The first was “Does Greece Need More Austerity?”:

As many of us have noted, it’s hugely unfair when people claim that Greece has done nothing to adjust. On the contrary, it has imposed incredibly harsh austerity and substantial reforms on other fronts. Yet you might be tempted to argue that the results show that Greece hasn’t done enough — after all, last year it was running only a tiny primary budget surplus (that is, not counting interest), and this year it has slipped back into primary deficit. So more adjustment is needed, right?

Well, step back for a minute and imagine that we weren’t talking about Greece but about the U.S. or the UK. When we look at our budgets, we normally focus not on the headline budget balance but on the cyclically adjusted balance — an estimate of what it would be at more or less full employment. This helps avoid pressure to pursue procyclical policies that make the economy unstable, and also gives a better idea of the long-run sustainability of the position. And while cyclical adjustment can be controversial, there are standard estimates from third parties like the IMF and the OECD.

So here’s a picture you probably haven’t seen: the IMF’s estimatesof the cyclically adjusted primary balances of eurozone countries in 2014:

Greece is, by this measure, the most fiscally responsible, indeed crazily austere, nation in Europe.

So why is it in fiscal crisis? Because the economy is deeply depressed.

Suppose that there were a way to end this depression. Then Greece’s fiscal problems would melt away, with no need for further cuts. But is there any way to do that?

The answer is, not as long as Greece remains in the euro. It can pursue reforms that might make it more competitive, but anyone promising dramatic, quick results has no idea what he is talking about.

On the other hand, Grexit would produce a rapid improvement in competitiveness, at the cost of possible financial chaos.This is not a route anyone has been willing to go down, but one does have to say that as the crisis worsens it becomes a more plausible outcome.

The thing to understand, in any case, is that if Grexit does come, fiscal issues will immediately cease to be central to the story. Instead, it will all be about handling bank panic, managing the transition to a new currency, and possibly removing structural obstacles to increased exports (which would very much include tourism).

In truth, this has never been a fiscal crisis at its root; it has always been a balance of payments crisis that manifests itself in part in budget problems, which have then been pushed onto the center of the stage by ideology.

Yesterday’s second post was “The Politicization of CBO Begins:”

Update: Richard Kogan has contacted me to say that while the claim of a worsening budget situation is made at the beginning of the report, the analysis that follows is in fact clean and careful. So we’re talking about a misleading statement rather than a misleading analysis. And sources close to CBO insist that the misleading statement was careless drafting rather than deliberate politicization. OK, I guess.

But this is not a place to be careless. My inbox filled up this morning with deficit scold cries of triumph — who knew that Fix the Debt was still out there? — saying, “see, CBO confirms that the deficit is spinning out of control”.That’s why I guessed that we were seeing political influence. If not, good — but in this charged environment, you have to be very, very careful.

What with everything else going on, a seemingly technical note from Richard Kogan at the Center on Budget and Policy Priorities may be slipping under the radar. But this is really important.

As Kogan notes, the Congressional Budget Office has released its latest set of long-run budget projections, declaring that “The long-term outlook for the federal budget has worsened dramatically over the past several years.” And this is quite scary — not the projections, but the fact that CBO would say this. Because as Kogan points out, the budget office’s own numbers contradict its claims.

The key point is that CBO makes what Kogan rightly calls an apples-to-oranges comparison, comparing pre-2010 current-law estimates that assumed that the Bush tax cuts would expire in full with later projections that incorporate their partial extension (as well as a related issue involving the Alternative Minimum Tax.) This doesn’t mark a real deterioration in the outlook, and it certainly doesn’t indicate out of control policy. In fact, the outlook isn’t particularly scary.

Oh, and as Kogan noted in another paper, CBO’s estimates are almost surely too pessimistic on interest rates, so that the long-run budget outlook is even less scary than it appears.

So what’s going on here? I can’t believe that CBO staff were confused about these issues. What it looks like, I’m sorry to say, is the first indication that the new, GOP-dominated CBO is in fact going to be politicized, engaging in deficit scare tactics when that suits the majority, pro-tax-cut scoring, and more.

The last post yesterday was “Two Centuries of Taylor Swift:”

I did an interview with Billboard on the economics of music; I’m not a real expert here, I just played one at SXSW, but I had some fun (and it is something I care about!)



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