Budget cuts in Portugal and California

The Austerity Delusion

By PAUL KRUGMAN; NYT.

Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.

What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.

It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.

It was not always thus. Two years ago, faced with soaring unemployment and large budget deficits — both the consequences of a severe financial crisis — most advanced-country leaders seemingly understood that the problems had to be tackled in sequence, with an immediate focus on creating jobs combined with a long-run strategy of deficit reduction.

Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.

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This is the same policy being recommended for California by the Republicans. 

 Read the entire column. http://www.nytimes.com/2011/03/25/opinion/25krugman.html

 Read the entire column. http://www.nytimes.com/2011/03/25/opinion/25krugman.html

Republicans make economic crisis worse + Krugman

Things Could Be Worse

By PAUL KRUGMAN

TOKYO. from the N.Y. Times 

“Japan’s problems now are the same as they were in the 1990s, when you were writing about them. It’s depressing.” So declared one economist I spoke to here. “But the Japanese don’t seem all that depressed,” objected another. Both were right — and the conversation crystallized some thoughts I’ve been having about Japan’s situation, and ours.

A decade ago, Japan was a byword for failed economic policies: years after its real estate bubble burst, it was still suffering from chronic deflation and slow growth. Then America had its own bubble, bust and crisis. And these days, Japan’s record doesn’t look that bad to an American eye.

Why not? For all its flaws, Japanese policy limited and contained the damage from a financial bust. And the question in America now is whether we’ll do the same — or whether we will take a hard right turn into economic disaster.

In the 1990s, Japan conducted a dress rehearsal for the crisis that struck much of the world in 2008. Runaway banks fueled a bubble in land prices; when the bubble burst, these banks were severely weakened, as were the balance sheets of everyone who had borrowed in the belief that land prices would stay high. The result was protracted economic weakness.

And the policy response was too little, too late. The Bank of Japan cut interest rates and took other steps to pump up spending, but it was always behind the curve and persistent deflation took hold. The government propped up employment with public works programs, but its efforts were never focused enough to start a self-sustaining recovery. Banks were kept afloat, but were slow to face up to bad debts and resume lending. The result of inadequate policy was an economy that remains depressed to this day.

Yet the picture is grayish rather than pitch black. Japan’s economy may be depressed, but it’s not in a depression. The employment picture has been troubled, with a growing number of “freeters” living from temporary job to temporary job. But thanks to those government job-creation plans, the country isn’t suffering mass unemployment. Debt has risen, but despite constant warnings of imminent crisis — and even downgrades from rating agencies back in 2002 — the government is still able to borrow, long term, at an interest rate of only 1.1 percent.

In short, Japan’s performance has been disappointing but not disastrous. And given the policy agenda of America’s right, that’s a performance we may wish we’d managed to match.

Like their Japanese counterparts, American policy makers initially responded to a burst bubble and a financial crisis with half-measures. I’ve lamented that fact, but at this point it’s water under the bridge. The question is: What happens now?

Republican obstruction means that the best we can hope for in the near future are palliative measures — modest additional spending like the infrastructure program President Obama proposed this week, aid to state and local governments to help them avoid severe further cutbacks, aid to the unemployed to reduce hardship and maintain spending power.

Even with such measures, we’ll be lucky to do as well as Japan did at limiting the human and economic cost of the economy’s financial woes. But it’s by no means certain that we’ll do even that much. If the Republicans go beyond obstruction to actually setting policy — which they might if they win big in November — we’ll be on our way to economic performance that makes Japan look like the promised land.

It’s hard to overstate how destructive the economic ideas offered earlier this week by John Boehner, the House minority leader, would be if put into practice. Basically, he proposes two things: large tax cuts for the wealthy that would increase the budget deficit while doing little to support the economy, and sharp spending cuts that would depress the economy while doing little to improve budget prospects. Fewer jobs and bigger deficits — the perfect combination.

More broadly, if Republicans regain power, they will surely do what they did during the Bush years: they won’t seriously try to address the economy’s troubles; they’ll just use those troubles as an excuse to push the usual agenda, including Social Security privatization. They’ll also surely try to repeal health reform, which would be another twofer, reducing economic security even as it increases long-term deficits.

So I find myself almost envying the Japanese. Yes, their performance has been disappointing. But things could have been worse. And the case Democrats now need to make — the case the president finally began to make in Cleveland this week — is that if Republicans regain power, things will indeed be worse. Americans, understandably, are disappointed over, frustrated with and angry about the state of the economy; but disappointment is better than disaster.

Myths of Austerity: Krugman

By PAUL KRUGMAN

When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions.

Which brings me to the subject of today’s column. For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

What reason do we have to believe that any of this is true? Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.”

Nonetheless, every few months we’re told that the bond vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight uptick in long-term interest rates was greeted with near hysteria: “Debt Fears Send Rates Up,” was the headline at The Wall Street Journal, although there was no actual evidence of such fears, and Alan Greenspan pronounced the rise a “canary in the mine.”

Since then, long-term rates have plunged again. Far from fleeing U.S. government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we don’t slash spending immediately.

But don’t worry: spending cuts may hurt, but the confidence fairy will take away the pain. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, the president of the European Central Bank, in a recent interview. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”

What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.) Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as I can tell, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today. For example, Ireland’s era of austerity-with-growth in the 1980s depended on a drastic move from trade deficit to trade surplus, which isn’t a strategy everyone can pursue at the same time.

And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk. Other good soldiers, like Latvia and Estonia, have done even worse — and all three nations have, believe it or not, had worse slumps in output and employment than Iceland, which was forced by the sheer scale of its financial crisis to adopt less orthodox policies.

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

deficits and the great recession: Krugman

The nature of America's troubles is easy to state.

We're in the aftermath of a severe financial crisis,

which has led to mass job destruction. The only thing

that's keeping us from sliding into a second Great

Depression is deficit spending. And right now we need

more of that deficit spending because millions of

American lives are being blighted by high unemployment,

and the government should be doing everything it can to

bring unemployment down.

In the long run, however, even the U.S. government has

to pay its way. And the long-run budget outlook was

dire even before the recent surge in the deficit,

mainly because of inexorably rising health care costs.

Looking ahead, we're going to have to find a way to run

smaller, not larger, deficits.

Paul Krugman.

Read the entire essay here: http://www.nytimes.com/2010/01/29/opinion/29krugman.html?ref=opinion

The Great Recession to last years: Krugman

Krugman


SEOUL, South Korea (AP) -- The United States may emerge from recession as early as this summer, though further job losses mean a "depressed economy" could last as long as five years, Nobel Prize-winning economist Paul Krugman said Tuesday.
"I think it's quite possible that industrial production in the United States and perhaps in the world as a whole will bottom out sometime in the next few months, that GDP growth in the United States will be positive in the second half of the year and maybe a little bit later than that in Europe," Krugman told a global financial conference in Seoul.
Krugman said that he would not be surprised if the U.S. recession, which began in December 2007, ended in August or September this year. But job losses were likely to continue into 2011, meaning "the period of a depressed economy" could last until 2013 or 2014, he said.
Krugman, who teaches at Princeton University, won the Nobel Memorial Prize in Economic Sciences last year for his analysis of how economies of scale can affect international trade patterns. He also writes columns for The New York Times.
The U.S. economy, the world's largest, contracted a worse-than-expected 6.1 percent on an annualized basis in the first quarter. Americans increased purchases of cars, furniture and appliances, but businesses cut back spending and exports had their biggest drop in 40 years. The U.S. unemployment rate hit 8.9 percent in April and many economists expect it to reach 10 percent by year's end.
Krugman said that while economic indicators from around the world are improving, they suggest that the pace of economic decline has only slowed.
"I share the optimism that the worst of this may be over," he said, also noting a stabilization in financial markets. "What's really hard, however, is to say when does this go beyond stabilization to an actual recovery."

Obama and economy

Obama v. Krugman


ROBERT KUTTNER | March 28, 2008 | web only The American Prospect.

Barack Obama's speech on the financial crisis was a remarkable breakthrough.
First, he connected all the dots -- between the complete dismantling of financial regulation, the declining economic opportunity and security for ordinary people, the current financial meltdown, and the political influence of Wall Street as the driver of these changes. Astounding! I wish I had written the speech. It is this kind of leadership and truth-telling that is the predicate for the shift in public opinion required to produce legislative change. A radical, appropriately nuanced, and deeply public-minded description of what has occurred, the speech was Roosevelt quality: the president as teacher-in-chief. Those who felt that Obama was capable of real growth that will transcend the campaign's early and somewhat feeble domestic policy proposals should feel vindicated.
The speech also showed real understanding and subtlety in grasping how financial "innovation" had outrun regulation, as well as a historical sense of the abuses of the 1920s repeating themselves. Obama is one of the few mainstream leaders -- Barney Frank is another -- calling for capital requirements to be extended to every category of financial institution that creates credit. This is exactly what's needed to prevent the next meltdown, but if it were put to a vote now, it would be rejected by legislators from both parties because they are still in thrall to market fundamentalism and Wall Street. That's where presidential leadership comes in.
So the speech was courageous, in that it goes well beyond the current Democratic party consensus, and one can only wonder about the reaction of some of Obama's own financial backers. He also took on a couple of other sacred cows, such as electricity and telecom deregulation, proven failures to everyone but industry defenders and their allies in the economics profession.
We should not focus too much attention on the oblique dig at the Clinton presidency, which indeed fomented the pattern of excessive deregulation. Let's remember, Bill was president, she wasn't. This is a totally fair drawing of a distinction on the issues, and not a cheap shot or ad hominem attack.
The Clinton camp's rejoinder -- that Hillary is proposing to do more for the victims of the housing bust -- is totally unpersuasive. All along, she has treated the housing mess as its own self-contained scandal, rather than connecting it to the larger set of financial bubbles of which it is a part. The Frank-Dodd bill, which Obama is co-sponsoring, is a realistic remedy for purely the housing part of the crisis. If you read Clinton's March 24 speech on the housing crisis and how to fix it -- supposedly more robust than Obama's remedy -- she offers the same Frank-Dodd bill. She does not locate the mortgage crisis in the deeper financial one. And her idea of turning, for wise men, to Robert Rubin and Alan Greenspan -- more than anyone the people who gave us this crisis -- is appalling.
The one slightly disappointing part of the Obama speech was his call for $30 billion more in "stimulus." It's not nearly enough. He -- and we -- should stop even using the word "stimulus." To dig out of this mess, at a time when we already have large deficits, the federal government will need to fund a multi-year, public investment-led recovery program well into the hundreds of billions. It will need to be funded by restoring taxes on rich people. But this is a topic for another day.
A real puzzle here is the repeated assertion by columnist Paul Krugman, in the face of mounting evidence to the contrary, that Clinton's views on economic policy are more progressive than Obama's. Indeed, Obama's stunning speech read as if it were informed by recent Krugman columns on the meltdown. Hillary has not said anything close to what Obama (or Krugman) has suggested.
Unlike some of my friends, I have not fallen in love with Obama. I have been at this too long, and you risk getting your heart broken. I actually shared Krugman's critique of Obama's health insurance individual mandate and his proposal to tax the upper middle class to pay for a much exaggerated Social Security shortfall that is more like a rounding error. I simply conclude, based on what I've seen, that Obama is capable of real learning and real transformation, both of himself and of public opinion. Nothing I've seen suggests that's true of Hillary Clinton.
But Krugman, ordinarily an ornament of fair-minded progressive economics commentary, writes almost as if he has become part of the Clinton campaign. His latest characterization of Obama's proposals in commenting on the New York speech -- "cautious and relatively orthodox" -- was preposterous. Even if Krugman's sympathies are with Clinton, he owes it to his readers and to his own credibility to play it straight and credit Obama with a breakthrough when credit is due. This was surely one of those times.
http://www.prospect.org/cs/articles?article=obama_v_krugman

Health care Terror: Krugman

Health Care Terror

By Paul Krugman

New York Times July 9, 2007

These days terrorism is the first refuge of scoundrels.
So when British authorities announced that a ring of
Muslim doctors working for the National Health Service
was behind the recent failed bomb plot, we should have
known what was coming.

"National healthcare: Breeding ground for terror?" read
the on-screen headline, as the Fox News host Neil
Cavuto and the commentator Jerry Bowyer solemnly
discussed how universal health care promotes terrorism.

While this was crass even by the standards of Bush-era
political discourse, Fox was following in a long
tradition. For more than 60 years, the medical-
industrial complex and its political allies have used
scare tactics to prevent America from following its
conscience and making access to health care a right for
all its citizens.

I say conscience, because the health care issue is,
most of all, about morality.

That's what we learn from the overwhelming response to
Michael Moore's "Sicko." Health care reformers should,
by all means, address the anxieties of middle-class
Americans, their growing and justified fear of finding
themselves uninsured or having their insurers deny
coverage when they need it most. But reformers
shouldn't focus only on self-interest. They should also
appeal to Americans' sense of decency and humanity.

What outrages people who see "Sicko" is the sheer
cruelty and injustice of the American health care
system - sick people who can't pay their hospital bills
literally dumped on the sidewalk, a child who dies
because an emergency room that isn't a participant in
her mother's health plan won't treat her, hard-working
Americans driven into humiliating poverty by medical
bills.

"Sicko" is a powerful call to action - but don't count
the defenders of the status quo out. History shows that
they're very good at fending off reform by finding new
ways to scare us.

These scare tactics have often included over-the-top
claims about the dangers of government insurance.
"Sicko" plays part of a recording Ronald Reagan once
made for the American Medical Association, warning that
a proposed program of health insurance for the elderly
- the program now known as Medicare - would lead to
totalitarianism.

Right now, by the way, Medicare - which did enormous
good, without leading to a dictatorship - is being
undermined by privatization.

Mainly, though, the big-money interests with a stake in
the present system want you to believe that universal
health care would lead to a crushing tax burden and
lousy medical care.

Now, every wealthy country except the United States
already has some form of universal care. Citizens of
these countries pay extra taxes as a result - but they
make up for that through savings on insurance premiums
and out-of-pocket medical costs. The overall cost of
health care in countries with universal coverage is
much lower than it is here.

Meanwhile, every available indicator says that in terms
of quality, access to needed care and health outcomes,
the U.S. health care system does worse, not better,
than other advanced countries - even Britain, which
spends only about 40 percent as much per person as we
do.

Yes, Canadians wait longer than insured Americans for
elective surgery. But over all, the average Canadian's
access to health care is as good as that of the average
insured American - and much better than that of
uninsured Americans, many of whom never receive needed
care at all.

And the French manage to provide arguably the best
health care in the world, without significant waiting
lists of any kind. There's a scene in "Sicko" in which
expatriate Americans in Paris praise the French system.
According to the hard data they're not romanticizing.
It really is that good.

All of which raises the question Mr. Moore asks at the
beginning of "Sicko": who are we?

"We have always known that heedless self-interest was
bad morals; we know now that it is bad economics." So
declared F.D.R. in 1937, in words that apply perfectly
to health care today. This isn't one of those cases
where we face painful tradeoffs - here, doing the right
thing is also cost-efficient. Universal health care
would save thousands of American lives each year, while
actually saving money.

So this is a test. The only things standing in the way
of universal health care are the fear-mongering and
influence-buying of interest groups. If we can't
overcome those forces here, there's not much hope for
America's future.

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