When Krugman of the economic (and social) American left and The Economist of the economic British and European right are agreeing...it's wise to pay attention.
They're agreeing on characteristics of both the European economic crisis and to an extent what actions should be taken by various nations, including the US, to best deal with respective national economic problems.
What they agree on are mostly facts--realities; yet, realities shockingly seldom heard in the US especially among commentators on the political right, both partisan Republicans and self-described libertarians.
(Image: cartoon of Adam Smith, Karl Marx, Friedrich Hayek, and John Keynes. Heaven forbid that even if they weren't all equallycorrect and incorrect, each thinker might each have been at least somewhatcorrect--and incorrect! Heaven forbid one of them mightn't have been 100% correct and the other three 100% wrong!)
Both Krugman and The Economist have recently pointed out that the European crisis is rooted as much or more in monetary policy than in fiscal irresponsibility evidenced by bloated welfare programs.
In terms of welfare programs' role, Krugman notes in "What Ails Europe?" that:
[I]n 1991, when Sweden was suffering from a banking crisis brought on by deregulation (sound familiar?), the Cato Institute published a triumphant report on how this proved the failure of the whole welfare state model.... Sweden, which still has a very generous welfare state, is currently a star performer, with economic growth faster than that of any other wealthy nation.
So, welfare programs' generosity aren't hurting Sweden. But note that Sweden is not a Eurozone country, either. Perhaps it's the Eurozone itself that's the problem. (Wait for it. The Economist ends up saying as much!)
But, Krugman looks at Eurozone nations, too, not just Sweden:
Look at the 15 European nations currently using the euro (leaving Malta and Cyprus aside), and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled GIPSI nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No, they don’t; only Italy was in the top five, and even so its welfare state was smaller than Germany’s.
The Economist in "A Very Short History of the Crisis" noted much the same recently:
Before the crisis the governments of both Ireland and Spain ran budget surpluses. Both meticulously kept within the limits for deficits and debts set down by the stability and growth pact—unlike Germany, which flouted the rules for four years from 2003 (and avoided punishment). Nor did Italy lurch into extravagance. (Emphasis mine.)
Krugman's summary of the European crisis is as follows, with The Economist's below that. Both note that large welfare bills are at least in part a result of the crisis.
Krugman:
By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.
More specifically, the creation of the euro fostered a false sense of security among private investors, unleashing huge, unsustainable flows of capital into nations all around Europe’s periphery. As a consequence of these inflows, costs and prices rose, manufacturing became uncompetitive, and nations that had roughly balanced trade in 1999 began running large trade deficits instead. Then the music stopped.
If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt
The Economist:
Debt in [the GIPSI nations] has become a burden not because of government profligacy but because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the financial sector. The European Central Bank oversaw a binge of cross-border lending. In the crisis unemployment and hardship have deepened, increasing the bill for welfare. Some countries, such as Ireland and Spain, have needed to find money to prop up their banks. These new expenses fell on the state just when tax receipts collapsed—catastrophically in countries that had seen a property boom
Krugman and The Economisteven share some degree of opposition to austerity as a way of addressing economies worsened by the 2088-2009 Great Recession, though Krugman is much more opposed. Also, he sees debt as a short-term necessary evil to be outweighed by the benefits of stimulus (i.e., government spending and tax relief) if the stimulus is sufficiently large, while The Economist is more fearful of debt and deficits.
Krugman's lack of alarm may be evidenced by statements like this:
[C]ountries that aren’t on the euro seem able to run large deficits and carry large debts without facing any crises. Britain and the United States can borrow long-term at interest rates of around 2 percent; Japan, which is far more deeply in debt than any country in Europe, Greece included, pays only 1 percent.
True, but a $15.5 trillion US debt? With interest it's more than $56.6 trillion! That's an astronomically staggering sum. Granted, the US GDP is $15.0 trillion, but can the US's GDP be expected to increase substantially anytime soon as a means of lowering the debt? Republicans say, yes, if taxes and regulations are cut. Output will increase and jobs and consumer spending will follow. Democrats say, yes, especially if government stimulus helps fuel new industries, increases the infrastructure the economy needs, and places money short-term in people's pockets--even the unemployed--so consumer demand doesn't devastatingly fall. To which Republicans have numerous counterpoints, to which Democrats have counter-counterpoints, etc.
It's an endless discussion, really.
An now to another point: it's an endless discussion that also is not going very well. I find the discussion to be most helpful when it's least ideological and partisan. But, that's dispiritingly rare these days.
I recently had the priviledge of joining Peter H. Schuck at a dinner at a friend's home. He's the author of Meditations of a Militant Moderate: Cool Views on Hot Topics. While the book focuses mostly on debates thriving in the first few years of this century, there's a basic principle at work in his analyses--articulated in various places in the book--that's relevant even more now than when the book was published, and it's a principle that I keep finding myself coming back to: the once not-so-shocking principle that many issues are complex, that there's inherent value in trying to understand others' perspectives, and that it's exceedingly rare that one side of in a debate is 100% right while all the other sides are 100% wrong.
This position seems to be one that fewer and fewer Americans hold--it particular, it's exactly the position not-held by commentators on Fox News and CNBC on one hand and MSNBC on the other.* Heaven forbid, some problems' solutions can't be summarized by a bumpersticker slogan. That goes for economics, too. When someone shouts (and it's increasingly frequently shouted) that you can't spend your way out of debt, it increasingly frequently strikes me as an overly narrow simplification of all things to be considered. I feel exactly the same way when someone else shouts that you also can't cut your way to growth. It's been refreshing in the past year when I've heard non-shouting types on TV say that cutting too much government spending too fast is dangerous and in the same breath say that debt is a serious problem. Guess what? These might not be mutually exclusive realities! (Gasp!) But the last word seems usually given on TV to someone insisting that one or the other economic viewpoint is totally wrong. I'm then inclined to remember that as strong as religious fundamentalism is, there's such a thing as epistemological fundamentalism, too: it's called being ideological, and it results in the politization of problem-solving, and it can make problems even harder to sort out.
See also:Keynes v. Hayek, a BBC Business news feature.
*This is the secondary reason why I mostly get my news from The PBS NewsHour and the BBC--the main reasons being the measured tone of the NewsHour and the BBC and the refusal of each to dumb-down content.
