12 Replies to “Paul Krugman on austerity”

  1. What I find remarkable is that when it comes to austerity, few, if any, of the austerity advocates advocate cutting back on war, surely the most wasteful use of a nation’s resources (& other nations’ resources) ever devised.

    1. Agree that we need to cut wasteful military expenditure (the US Navy are building $3bn stealth ships when they already have submarines). But we always need to carry a big stick else our enemies will grow bolder and could make war inevitable.

  2. I disagree………..Krugman is still a lost soul. I agree with the other 2 guests who actually have a grasp on reality.

    1. They have the right solution but the wrong timing. You have to stick the engine in reverse before the financial crisis — in order to reduce the impact — and not afterwards — when the economy is already going backwards.

  3. Governments have to LEARN how to save. Austerity is a sink or swim approach to this learning. An international coordinated stimulus approach might work in accelerating out of the oncoming collision but do we really trust the different drivers’ abilities.
    Maybe if we were all driving AUDI’s, VW’s, BMW’s and Merc’s…..

    1. Governments take the line of least resistance: whatever gets them re-elected. It is VOTERS who have to learn how to save — and to hold government to account for their actions.

      1. Not sure if you will read this but what incentive do VOTERS have to save when the Fed sets interest rates at 0.25% leading to negative real rates of return. Sorry but with all due respect your comment is rather hypocritical and seems somewhat of a copout. Good saving habits are currently being penalised!

      2. Voters have to hold government and central banks to account for their actions. Governments that run deficits other than in times of war or dire emergency should be punished at the polls. The Fed should not be allowed to manipulate interest rates to encourage debt expansion. Savers are being robbed as you say but they hardly utter a whimper when the Fed cuts rates.

      3. Thanks for answering. The way I see it is this: Using Australia as an example, Swan says we’re having a budget surplus (….yeah right…just look at ALP’s recent history of budget deficit blowouts) but right on cue the RBA cuts 50 bps (and later another 25)… indebted sheeple (who are the majority anyway) get immediate gratification through reduced mortgages….. and conscientious savers (pensioner minority) are slowly squeezed and either don’t understand (majority – sheeple parents of the indebted sheeple) or don’t start complaining until their investment returns are down at the end of the year, by which time everyone’s forgotten why, which is good for the government because that surplus turns into a $20bn deficit (blame China)…and we’ll also have higher inflation further eroding savings through negative real returns because the RBA got GDP wrong (One wonders about real vs nominal GDP and adjusted inflation measures but I will save all that for another post).

        So the only way to get government into the habit of saving is to force them to learn. Who is going to do this? You say the voters. I say no chance. The opposition? Possibly but I honestly don’t give them the credibility to work this out either and also wouldn’t guarantee that they will be any better. So who do we have left to vote for? Oh and we can’t vote for the RBA governor either. We have no power and can only hope that incompetent policy makers will get lucky! But in Europe, this imposition is coming from the Germans via the EU Fiscal pact.

        Bottom Line: If you want to stay in the Euro, play by the rules. If you don’t like the rules, leave! No one is forcing any countries to stay but is there no legal basis for kicking them out.

      4. Voters are more concerned with keeping the punch bowl topped up than with who is paying for the drinks. Politicians tell them the rich will pay. If they believe that, they deserve the government they get.

  4. Krugman agrees with Keynes’s General Theory which explains how fiscal and monetary policies are interlinked so that a move in one direction will cause chain reactions until an economy once again reaches equilibrium. So being Keynesian does not mean agreeing with big government. It means that fiscal policy will be a part of GDP and therefore changes to fiscal policy will affect GDP growth. A rise in GDP helps tax revenues which is why fiscal policy is so important now. It was even more important during the Great Depression when Keynes advocated government spending.

    The General Theory also explains the present mess in Europe because fiscal policy is divorced from monetary policy. In a single economy with its own currency and monetary policy, the profligate government spending of southern Europe would have seen their central banks respond with higher interest rates. This of course is not possible in the Euro so you have had long-term imbalances, which have had no chance to be corrected by adjusting monetary policy to the needs of individual countries. Hence those economies cannot reach equilibrium and we then have misplacing of risk in terms of lending to countries in their government, corporate and personal sectors. Under Keynes the Euro was designed to fail.

    Paul Davies
    Postgraduate Economics Student

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