Krugman’s blog, 7/15/15

There were three posts yesterday.  The first was “Angry Germans:”

Jacob Soll writes about the destructive anger he saw at a German conference on euro issues; I can second that observation.

You see, I’ve been getting a lot of mail from Germany lately, in a break from (or actually an addition to) my usual deluge of right-wing hate mail. I’m well aware that this is a highly distorted sample, since I’m only hearing from those angry enough and irrational enough — seriously, what do the writers expect to accomplish? — to send such things. Still, the content of the correspondence is striking.

Basically, the incoming missives take two forms:

1. Obscenities, in both English and German

2. Bitter accusations of persecution, along the lines of “As a Jew you should know the dangers of demonizing a people.” Because criticizing a nation’s economic ideology is just like declaring its people subhuman.

Again, these are letter-writers, and hardly representative. But Germany’s sense of victimization does seem real, and is a big problem for its neighbors.

Yesterday’s second post was “An Unsustainable Position:”

Everyone is talking about the IMF’s new update to its debt sustainability analysis, which says that Greece’s attempt to surrender is doomed to failure without massive debt relief. That’s surely the right conclusion.

However, it’s hard to accept the document’s claim that this is a new development, the result of the banking crisis of the past two weeks plus the economic troubles since Syriza came to power. If the original plan for Greece made any sense, whatever damage has been done recently should be largely reversible: restore liquidity to the banks, establish a government of faithocrats who restore confidence, and debt should end up peaking only a few percentage points of GDP higher than previously predicted. That is, even if you accuse Syriza of botching things terribly, no economic analysis I know of says that a few months of misgovernment permanently damage a country’s growth prospects.

The point, surely, is that the plan for Greece was never feasible. No matter how willing a nation is to suffer, no matter how willing to run primary surpluses on a scale that is very rare in history, trying to pay off high debt through austerity without any kind of monetary offset is basically a recipe for debt deflation and failure. This is, in fact, what the IMF’s own research has said.

And the return to growth last year would have turned out to be a false dawn even without the political crisis. That slight uptick largely reflected a pause in austerity — and would have gone away regardless as the troika resumed tightening the fiscal vise.

So it’s good to see the IMF being realistic here, but the institution remains unwilling to face up fully to past errors — which matters, because these past errors are prologue to the doom that faces any attempt to stay the course.

“Stay the course” is a phrase that should have been stricken from the English language years ago…  The last post yesterday was “History Lessons for Euro Debtors:”

When the financial crisis struck, there were widespread calls for new economic thinking; surely, many believed, the drastic events showed that there was something terribly flawed about economic analysis. In fact, however, the crisis itself, and even more the developments that followed, have been anything but puzzling. Again and again, things have played out pretty much the way you would have expected if you (a) understood and took seriously basic Hicks/Keynes macroeconomics and (b) paid attention to the relevant economic history.

The problem has been that all too many policymakers and pundits were and are either ignorant of these basics or determined to ignore them — or, putting these together, determined to be ignorant. Year after year, as we reproduce the 1930s, the usual suspects have been obsessed with fears of a return to the 1970s; as we become Japan they worry that we’re about to become Zimbabwe; and so on.

So, on the issue of the moment, there are actually quite good historical models for what Greece has been trying to do — cope with a large debt overhang via austerity policy. Britain, after all, emerged from each world war with very high public debt. Its debt burden just after World War I was, as a share of GDP, roughly comparable to Greece’s in 2009; its burden after World War II was twice as high.

What happened? Almost three years have passed since the IMF — yes, the IMF — pointed out that Britain between the wars tried a strategy much like that of European debtors: hard money plus austerity. Britain was incredibly determined, running huge primary surpluses as a share of GDP; but it failed to make a significant dent in the debt burden, because deflation ate up any gains from fiscal austerity:


Bank of England and IMF

The story after World War II was very different. While Britain did run primary surpluses, they were for the most part considerably smaller than after World War I. But the debt ratio fell dramatically, because of the combination of inflation and financial repression that helped keep interest rates low:


Bank of England and IMF

The secret of Britain’s success the second time around? After World War I it returned to the gold standard; while it did eventually let the pound fall, at that point this mainly was just sufficient to offset global deflation in the face of the Great Depression. After World War II Britain faced a world economy with rising prices, but nonetheless sharply devalued the pound in 1949:


Bank of England

What, in this history, would lead anyone to believe that the troika’s policies for Greece had any chance of succeeding?

Now what? If Greece still had its own currency, the case for devaluation would be completely overwhelming at this point. What this means, in turn, is that everything — the ongoing economic disaster in Greece, the bitter divisions within the euro area, the perplexity of even the best intentioned policymakers — flows from the supposedly insuperable technical difficulties of going off the euro.

Can this possibly make sense given the extremity of the situation?

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One Response to “Krugman’s blog, 7/15/15”

  1. Pink Education Says:

    I wouldn’t pay attention to anyone who points as “as a Jew….”. Number two this is one of the few texts u write that I can follow w/o searching and reading excerpts of distinguished economists like yourself. But the problem as u r painfully aware that the greater public sentiment is essentially viral and emotional. My son relates the tale of uninformed opinions on wind energy and nuclear power plants and how one could if not an engineer be easily fooled. But it’s worse of course. The writers believe they are scientifically correct. Yesterday’s Iranian agreement was substantially the same. Phrases like Likudian danced around the May Pole as if they were distancing themselves from errant information. Bibi was belligerent and bellicose and unable to form an opinion on the safety of Israel because he’s not an American Democrat. Such is the world we live in. The only way I live with these events is to dream I don’t fully understand them because my data is insufficient. I laugh out loud as it were thinking of you trying to explain economics to Ryan, Jeb et al.

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