Krugman’s blog, 7/10, 7/11 and 7/12/15

There were two posts on Friday, one on Saturday, and two yesterday.  Friday’s first post was “Austerity and the Greek Depression:”

Olivier Blanchard offers a defense of the IMF’s role in the Greek crisis. Basically, he argues that given the political realities, there was no alternative to requiring that Greece move into primary budget surplus, whatever the cost. This is surely true.

But how big was the cost? I’m with Brad DeLong in being highly puzzled by this assertion:

The decrease in output was indeed much larger than had been forecast. Multipliers were larger than initially assumed. But fiscal consolidation explains only a fraction of the output decline. Output above potential to start, political crises, inconsistent policies, insufficient reforms, Grexit fears, low business confidence, weak banks, all contributed to the outcome.

Where is this coming from? I look at the data prior to this year — when we have indeed seen a crisis of confidence — and Greece’s output decline looks like just about what you should have expected given the austerity imposed. The chart shows changes in the structural budget balance versus changes in output, for all eurozone countries for which the IMF provides estimates of both numbers.

The line is the relationship between austerity and growth fitted to all eurozone countries except Greece, implying a multiplier of 1.5; I extrapolate that line down to Greece, and it’s pretty close. Obviously you could do more complicated analyses, but on the face of it Greece appears to have suffered a slump overwhelmingly because of the austerity; surely there’s no grounds for dismissing this impact as a mere fraction of the problem.

So if the austerity was necessary, so was the depression-level slump — a slump that has left Greece’s debt ratio far higher after 5 years of hell than it was when the program began.

What this tells us is that the Greek program was infeasible from the start. A very big debt haircut early in the game might not have offered much relief from the slump, but it would have at least offered a chance to avoid debt deflation. Other than that, given the political constraints, there was no way this could have worked.

So now what? A few months ago I thought that stabilizing Greece at a small primary surplus might work, in the sense that it would allow a return to growth even if it didn’t do anything to make up lost ground. But the creditors are still demanding a rising primary surplus over time, and balking at top line debt relief that might at least offer a clear marker of progress. If those are the requirements for Greece to stay in the eurozone, Grexit is inevitable.

Friday’s second post was “The Inconceivable Success of Obamacare:”

Yesterday, for my sins, I went to Freedomfest, the libertarian conclave in Las Vegas, to debate Stephen Moore of the Heritage Foundation. It went pretty much as you might expect: evidence, evidence, evidence versus Reagan, Reagan, Reagan. But in a way the most interesting thing was the audience reaction when I described Obamacare as a major success story so far: boos and hissing.

What’s amazing about this is that the good news about Obamacare isn’t really debatable. It’s a simple fact that there has been a stunningly rapid drop in the number of uninsured, coming from multiple independent sources. It’s also a simple fact that outlays on Medicaid and exchange subsidies are coming in well below projections.

You can argue that this is all temporary — that premiums will eventually skyrocket even though they haven’t yet, that the predicted death spiral will come back from the er, dead. But Obamacare is, by any measure, doing better so far than even its supporters expected.

But this wasn’t supposed to happen — and therefore, given the epistemology of the modern American right, it didn’t. Failure was inevitable, success inconceivable, and therefore failure must have happened.

Saturday’s post was “Jeb and the Nation of Takers:”

Maybe we were unfair to Mitt Romney; Jeb “people should work longer hours” Bush is making him look like a model of empathy for the less fortunate. All the obvious points apply: longer hours would mean more GDP (if and when the economy ever gets back to full employment), but not necessarily better lives, especially if the increase in GDP doesn’t trickle down.

But I think it’s also important to understand where this is coming from. Partly it’s Bush trying to defend his foolish 4 percent growth claim; but it’s also, I’m almost certain, coming out of the “nation of takers” dogma that completely dominates America’s right wing.

At my adventure in Las Vegas, one of the questions posed by the moderator was, if I remember it correctly, “What would you do about America’s growing underclass living off welfare?” When I said that the premise was wrong, that this isn’t actually happening, there was general incredulity — this is part of what the right knows is happening. When Jeb Bush — who is a known admirer of Charles Murray — talks about more hours, he’s probably thinking largely about getting the bums on welfare out there working.

As I asked a few months ago, where are these welfare programs people are supposedly living off? TANF is tiny; what’s left are EITC, food stamps, and unemployment benefits. Spending on food stamps and UI soared during the slump, but came down quickly; overall spending on “income security” has shown no trend at all as a share of GDP, with all the supposed growth in means-tested programs coming from Medicaid:

Congressional Budget Office

But isn’t there an epidemic of people declaring themselves disabled? Actually, no. You have to bear in mind the reality that people don’t stay perfectly healthy until they reach 65, or 70, or whatever age plutocrats think they should work until. As all of us pre-seniors can attest, things start to go wrong with increasing frequency all along the life cycle; sometimes they can be managed, but often they can’t, especially for manual workers. And if you look at age-adjusted disability rates, they have been flat or even declining:


Economic Policy Institute

But none of this will, of course, make any dent in the right-wing narrative: they just know that the rising number of bums on welfare is a problem, even though there basically isn’t any welfare and there are no more bums than there ever were.

The first post yesterday was “Disaster in Europe:”

Obviously the news from Europe is terrible, with much confusion about exactly what is happening. Here’s what I think is the story, although I haven’t done any independent reporting.

1. Tsipras apparently allowed himself to be convinced, some time ago, that euro exit was completely impossible. It appears that Syriza didn’t even do any contingency planning for a parallel currency (I hope to find out that this is wrong). This left him in a hopeless bargaining position. I’m even hearing from people who should know that Ambrose Evans-Pritchard is right, that he hoped to lose the referendum, to give an excuse for capitulation.

2. But substantive surrender isn’t enough for Germany, which wants regime change and total humiliation — and there’s a substantial faction that just wants to push Greece out, and would more or less welcome a failed state as a caution for the rest.

3. I don’t know if some kind of deal might still be approved; even if it is, how long can it last?

The thing is, all the wise heads saying that Grexit is impossible, that it would lead to a complete implosion, don’t know what they are talking about. When I say that, I don’t mean that they’re necessarily wrong — I believe they are, but anyone who is confident about anything here is deluding himself. What I mean instead is that nobody has any experience with what we’re looking at. It’s striking that the conventional wisdom here completely misreads the closest parallel, Argentina 2002. The usual narrative is completely wrong: de-dollarization did *not* cause economic collapse, but rather followed it, and recovery began quite soon.

There are only terrible alternatives at this point, thanks to the fecklessness of the Greek government and, far more important, the utterly irresponsible campaign of financial intimidation waged by Germany and its allies. And I guess I have to say it: unless Merkel miraculously finds a way to offer a much less destructive plan than anything we’re hearing, Grexit, terrifying as it is, would be better.

Yesterday’s last post was “Killing the European Project:”

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany’s good intentions after this?

In a way, the economics have almost become secondary. But still, let’s be clear: what we’ve learned these past couple of weeks is that being a member of the eurozone means that the creditors can destroy your economy if you step out of line. This has no bearing at all on the underlying economics of austerity. It’s as true as ever that imposing harsh austerity without debt relief is a doomed policy no matter how willing the country is to accept suffering. And this in turn means that even a complete Greek capitulation would be a dead end.

Can Greece pull off a successful exit? Will Germany try to block a recovery? (Sorry, but that’s the kind of thing we must now ask.)

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

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