Thursday, May 6, 2010

Blog Post on the Grecian Burn

So little beauty and truth, what would Keats make of it?

(Reuters) - Greek protesters set fire to a bank, killing three people, on Wednesday in the most violent reaction to date to the government's austerity plan.

Groups of masked youths hurled petrol bombs, stones and sticks at riot police as nearly 50,000 striking workers and public servants marched to parliament, where a bill dictating pay cuts and tax hikes was due for debate.

Eyewitnesses said marchers chanted "Thieves!"...

Do Greece citizens really believe their problem is that the government has stolen from them?

Paul Krugman apparently sees it differently:

Consider what Greece would get if it simply stopped paying any interest or principal on its debt. All it would have to do then is run a zero primary deficit — taking in as much in taxes as it spends on things other than interest on its debt. But here’s the thing: Greece is currently running a huge primary deficit — 8.5 percent of GDP in 2009. So even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity. [E.A.]

Rather than shouting about theft, the Greeks might want to acknowledge they simply spend too much. They've been financing this through borrowing, but no one wants to lend to them anymore. At least not at rates they can afford.

Burning down all the banks in Greece won't change that.


J. Strupp said...

Those couple of sentences written by Krugman have been in the back of my mind for the past couple days.

Considering Greece's ongoing primary account deficit, is their any doubt that default is inevitable? And considering that inevitabilty, is there any doubt the Spain and Portugal will be in the same position as Greece at some point?

And most of this debt is held by German and French banks folks.

Dad29 said...

Curious that Krugman does not apply the same logic to ObamaDeficits, no?

J. Strupp said...

Not really.

We have exchange rate flexability and, therefor, we have the ability to devalue the dollar and export our way of depression. Krugman's stance on Greece is based on the fact that the Greeks do not have this luxury. If they did, he would advocate that they devalue their currency, thus boosting exports (tourism whatever) and grow their way out of severe recession (along with austerity measures).

P.S. Krugman is not a blind advocate of deficit spending. He's an advocate of deficit spending while in a liquidity trap. He's been very consistant on this issue Dadster.

Jeremy R. Shown said...


Krugman is also a fan of deficits when Democrats run them.

J. Strupp said...

Krugman is a fan of deficits when Democrats run them in a liquidity trap. He's not a fan when Democrates and Republicans run them in normal times. He was very outspoken about debt reduction during the surplus years of the late 1990's while everyone else was talking about tax cuts/rebates that contributed to putting us right back into deficits almost immediately after being enacted.

J. Strupp said...

I went back and read the 2006Krugman piece which was partially cited in your blog entry. Here's the link:

While Krugman advocates continuing EXISTING deficit levels (in terms of debt/GDP), I still don't agree with the statement that Prof. Krugman is a "fan" of deficits. From the same column you reference:

"In a saner political environment, the economic logic behind Rubinomics would have been compelling. Basic fiscal principles tell us that the government should run budget deficits only when it faces unusually high expenses, mainly during wartime. In other periods it should try to run a surplus, paying down its debt."

And one more from the same piece:

"I'm for pay-as-you-go. The question, however, is whether to go further. Suppose the Democrats can free up some money by fixing the Medicare drug program, by ending the Iraq war and/or clamping down on war profiteering, or by rolling back some of the Bush tax cuts. Should they use the reclaimed revenue to reduce the deficit, or spend it on other things?

The answer, I now think, is to spend the money -- while taking great care to ensure that it is spent well, not squandered -- and let the deficit be. By spending money well, Democrats can both improve Americans' lives and, more broadly, offer a demonstration of the benefits of good government. Deficit reduction, on the other hand, might just end up playing into the hands of the next irresponsible president."

While these statements by no means make Krugman a deficit hawk back in 2006, I don't think he's making a case for increasing deficits simply because the Democrats are in charge again. He's making a case for reallocating expenditures saved by fixing bad policy to more beneficial programs vs. using these reductions for deficit reduction. IOW, he advocates debt/GDP stabilization.

Josh said...

P.S. Krugman (and Delong) still favor Pay-Go once we return to more normal economic conditions.

The idea that we can somehow achieve some sort of major reductions in the deficit without serious economic consequences is far fetched, given our future entitlement obligations.

Debt stabilization is not.

Jeremy R. Shown said...


My point was that we weren't in a liquidity trap in 2006 and Krugman was OK with continuing (not increasing) deficit spending.

He said so explicitly. His approval was based on the spending being done for things of which he personally approved.

That strikes me more as political rather than economic analysis. If that is what Krugman is engaged in, that is perfectly fine. It just shouldn't be allowed to masquerade as a dispassionate assessment of the economic situation.

J. Strupp said...

I would agree, based on your blog post, that Krugman was O.K. with existing debt levels in 2006. But I think it's quite another thing to assume that he is (or was) a fan of deficits. His piece makes it very clear what he thinks should have been done in the late 90's and wasn't.

"His approval was based on the spending being done for things of which he personally approved."

Not the war in Iraq, not the 2003 tax cuts, not the existing health care plan in 2006. Krugman's approval was based in existing debt levels, not the composition of government spending at the time.

And I wouldn't say that Krugman has ever masqueraded as dispassionate regarding economic policy. He openly admits to being liberal. The question is whether that has defined his position on economics or the other way around.

Based on his work as an economist, I would say the latter but that's me.