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Krugman Says Austerity Obsession Will Breed Long-Term Problems

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http://www.bloomberg.com/news/articles/2015-05-14/krugman-says-austerity-obsession-will-breed-long-term-problems

Paul Krugman said governments that obsess over deficit reduction are breeding longer-term economic problems, reiterating long-held views against austerity.

His comments at an event in Oxford, England, come a week after U.K. Prime Minister David Cameron won a surprise election victory on a platform partly built on aggressive budget cuts.

“Governments that are obsessed with fiscal rectitude are going to be an even bigger problem,” the Nobel economics laureate said. “Drawing the wrong lessons from recent events could be a really bad problem in years ahead.”

Krugman has been a longtime vocal critic of austerity -- including Cameron’s cutbacks since he first came to power in 2010 -- and his views have been in the spotlight this month after the Conservative Party’s election win. That result has also led to criticism of Krugman’s position by Harvard historian Niall Ferguson.

Krugman said the biggest challenge facing the U.K. economy under Cameron will be “what appears to be the fact that the government believes its own propaganda, believes its own legend, believes that its political success validates the policies it has pursued.”

“They’ve basically been given a chance to make the same mistakes again and are likely to seize it,” he said.

On the economy, he said it’s proving “very difficult” to interpret, citing the labor market and “something very strange about the relationship between output and employment.”

“In many respects, the U.K. is giving off the signals of an economy that is still very depressed,” he said. “For some reason there really has been a catastrophic, really unprecedented, stall in productivity growth, which is more or less unique to Britain.”

The propaganda is that there has been any austerity, we have been borrowing £80bn+ a year now for a number of years a huge deficit which implies no austerity unless of course we should be borrowing triple this amount.

The stall in productivity growth is apparently down to low wage jobs, so no real shock there.

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http://www.bloomberg.com/news/articles/2015-05-14/krugman-says-austerity-obsession-will-breed-long-term-problems

The propaganda is that there has been any austerity, we have been borrowing £80bn+ a year now for a number of years a huge deficit which implies no austerity unless of course we should be borrowing triple this amount.

The stall in productivity growth is apparently down to low wage jobs, so no real shock there.

Hmm. German and Spanish economies are austerity driven (government deficit lower than 3%) and they are thriving. Perhaps there is some causality ???

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There's nothing strange or difficult about the relationship between employment and output. Bubble jobs in finance, insurance and construction were wiped out by the Crash and have been replaced by much lower paying jobs elsewhere and/or self-employment.

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So, we went on the biggest credit binge in history (how else did we get to total debt of 1000% of GDP?), and now when the inevitable post binge contraction sets in, they say "we want more credit/debt or else we will suffer!!!

yeah right. The best cure for a hangover is more hard drink ??!!

At some point you have to wring the credit bubble out of the system. There is no painless way of doing it. If that's called austerity, then so be it.

Edited by evetsm

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http://www.bloomberg.com/news/articles/2015-05-14/krugman-says-austerity-obsession-will-breed-long-term-problems

The propaganda is that there has been any austerity, we have been borrowing £80bn+ a year now for a number of years a huge deficit which implies no austerity unless of course we should be borrowing triple this amount.

The stall in productivity growth is apparently down to low wage jobs, so no real shock there.

Osborne definately cut in 2010/11/12 so you are wrong on that. Unfortunately due to monetary policy being unable to offset that it led to a reduction in output. hence his austerity increased debt (the opposite of Osbornes intention or claim). It de facto resulted in cumulative lost output and thus higher debt today and the need for more cuts (in Osbornes warped mind) in future.

Austerity, in a recession and at ZLB, was and will continue to be a failure. People need to simply get over their incorrect macro view on this, theyre making themselves look stupid. As indeed Osborne did until he retreated and was forced to launch htb in 2013/14 to try and kick some growth into the economy.

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So, we went on the biggest credit binge in history (how else did we get to total debt of 1000% of GDP?), and now when the inevitable post binge contraction sets in, they say "we want more credit/debt or else we will suffer!!!

yeah right. The best cure for a hangover is more hard drink ??!!

At some point you have to wring the credit bubble out of the system. There is no painless way of doing it. If that's called austerity, then so be it.

You completely mistate and/or misunderstand what happened. Presumably for political reasons?

You can reduce debt to gdp over say the next 20-30 years without all this stupid front end loaded political clap trap nonsense.

This idea of "pain" being good for an economy is plain silly. Its pure quackery.

"Pain" is a signal from the brain to stop doing what you are doing because it is harming you. If you ignore that signal you will die or permanently harm yourself.

Edited by R K

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02

Osborne definately cut in 2010/11/12 so you are wrong on that. Unfortunately due to monetary policy being unable to offset that it led to a reduction in output. hence his austerity increased debt (the opposite of Osbornes intention or claim). It de facto resulted in cumulative lost output and thus higher debt today and the need for more cuts (in Osbornes warped mind) in future.

02

Austerity, in a recession and at ZLB,02 was and will continue to be a failure. People need to simply get over their incorrect macro view on this, theyre making themselves look stupid. As indeed Osborne did until he retreated and was forced to launch htb in 2013/14 to try and kick some growth into the economy.

typical one eyed Keynesian. They cannot see what happened before the bust. We got the bust because of a crackup-stupid credit binge !

Now that the inevitable bust arrived, they look at their stupid text books and on page whatever it says "issue credit in a bust"

these people are a danger to themselves, if not society

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the myopic Keynesians think debt doesn't matter because every debit has a credit, every liability has an asset. They find that on page whatever of their daft textbooks.

What they conveniently leave out is credit is a claim on future production of commodities, goods and services. And when the real economy cannot keep pace producing to meet the monumental claims on it, then the whole steaming pile of credit/debt, assets liabilities defaults and those so called assets are not worth a snot wipe.

The Keynesians in their Neverland leave half the variables out of their premise. No wonder they come to the wrong conclusion every time.

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the myopic Keynesians think debt doesn't matter because every debit has a credit, every liability has an asset. They find that on page whatever of their daft textbooks.

What they conveniently leave out is credit is a claim on future production of commodities, goods and services. And when the real economy cannot keep pace producing to meet the monumental claims on it, then the whole steaming pile of credit/debt, assets liabilities defaults and those so called assets are not worth a snot wipe.

The Keynesians in their Neverland leave half the variables out of their premise. No wonder they come to the wrong conclusion every time.

Ah. Political then.

Fact is if you want higher interest rates, sooner, i.e. monetary tightening (or less accomodation) then of course you want looser not tighter fiscal policy.

So, Osborne's austerity obsession keeps house prices higher for longer. Exactly the outcome we have seen in fact.

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why are the Keynesians so pervasive if they are so wrong? They cannot all be so stupid ?

What if they know exactly what they are doing and this is a ruse to issue unpayble debt and offload it before it stinks the place out, and swap the proceeds for hard assets ? is what if it is the biggest heist in the history if the world ?

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Beat me to it. This arsehole has no business lecturing anybody in the world over what policies are right for the long term.

Never forget, never forgive.

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why are the Keynesians so pervasive if they are so wrong? They cannot all be so stupid ?

What if they know exactly what they are doing and this is a ruse to issue unpayble debt and offload it before it stinks the place out, and swap the proceeds for hard assets ? is what if it is the biggest heist in the history if the world ?

Monetarism and Keynesianism are essentially one parameter economic models. Monetarists believe that controlling the money supply can bring about optimal economic outcomes, Keynesians believe that govt spending is the key. In everything else they are indistinguishable. Each adheres to the familiar neoclassical assumptions of market clearing general equilibrium and rational expectations (selfishness + infinite foresight etc.). In effect, they are opposite sides of the same free market coin. It's interesting to observe that many of the sponsors of Hilary Clinton's presidential campaign are American banks, yet as Democrat she should be expected to favour Keynesian deficit spending ahead of her Republican rivals.

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why are the Keynesians so pervasive if they are so wrong? They cannot all be so stupid ?

What if they know exactly what they are doing and this is a ruse to issue unpayble debt and offload it before it stinks the place out, and swap the proceeds for hard assets ? is what if it is the biggest heist in the history if the world ?

Because its negative hypothesis and therefore cannot be disproved i.e. no matter how much we borrow and spend it can at any juncture be claimed "things would be better if only we had borrowed and spent even more".

It should be noted though that keynes advocated cyclic productive public sector investment, not just a raw injection of cash.

Edited by goldbug9999

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Monetarism and Keynesianism are essentially one parameter economic models. Monetarists believe that controlling the money supply can bring about optimal economic outcomes, Keynesians believe that govt spending is the key. In everything else they are indistinguishable. Each adheres to the familiar neoclassical assumptions of market clearing general equilibrium and rational expectations (selfishness + infinite foresight etc.). In effect, they are opposite sides of the same free market coin. It's interesting to observe that many of the sponsors of Hilary Clinton's presidential campaign are American banks, yet as Democrat she should be expected to favour Keynesian deficit spending ahead of her Republican rivals.

to support aggregate demand when the economy is running below potential and in this specific case of the zero bound on monetary policy.

Let's not get carried away Zugz.

Even in 2007 (before the recession) Osborne was saying this:

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Edited by R K

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You completely mistate and/or misunderstand what happened. Presumably for political reasons?

You can reduce debt to gdp over say the next 20-30 years without all this stupid front end loaded political clap trap nonsense.

This idea of "pain" being good for an economy is plain silly. Its pure quackery.

"Pain" is a signal from the brain to stop doing what you are doing because it is harming you. If you ignore that signal you will die or permanently harm yourself.

Really.

Explain how you would do this whilst continuing to run a deficit.

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to support aggregate demand when the economy is running below potential and in this specific case of the zero bound on monetary policy.

Let's not get carried away Zugz.

Even in 2007 (before the recession) Osborne was saying this:

Only because they had spent 7 years getting trounced with sane economic policies overwritten by Labour's Only Boom policies, always promising ever more spending, Blair throwing speeches about how going to spend evermore billions on this that and x3 education.

Got to the stage where they had to throw in something to entice vs Labour glory promises and the HPI galore. Only match btw (with some codas too), not more more more as Labour was always promising during the boom and other elections.

All lapped up by the bubble lovers, who now want continuation... who can't stand the idea of correction being absorbed, and the market then self-correcting... Hale types having to sell for less to saver-renters... no... those types think of themselves as untouchable and superior.

Carrot and stick policies preferred 'Gov Spending more to prop it all up and thus lower borrowing prices to help you borrow more to start businesses in a bubble, and one day you might buy at ever higher asset prices... but any softness, Gov Spending again and more HPI and more carrot and stick... protect the HPI'.

Michael Howard?????? He was exasperated at the situation with Brown and HPI. He recognised all sane economic values had been lost under Labour, and only a huge crash could bring minds back into focus, and get Labour out of office Conservatives couldn't get the electorate to listen as Labour was throwing a full on HPI party, always promising billions more on spending, such as education x3, and loads of other freebies.

1 October 2005

Departing Tory leader Michael Howard said he believes only an economic slump can return the Conservatives to power.

He told the paper: "When most people are relatively content with their economic lot, it is very hard for an opposition to win elections.

"I don't want the economy to go down the pan - I care about the country and I don't want anybody to go through any economic difficulties.

http://news.bbc.co.uk/1/hi/uk_politics/4299490.stm

Howard 2004.

"We must get a grip on public spending, cut back on waste, reduce regulation and cut taxes."

Mr Howard accused Chancellor Gordon Brown of favouring a European-style economic model of heavy regulation and high taxes rather than what he said was a more flexible and competitive US-style capitalism.

The Conservative leader stopped short of committing himself to specific tax cuts if he comes to power.

But he said Conservative plans to cut regulation and waste and reduce the rate of growth in public spending would "get us to a position where we can actually start to reduce taxes".

http://news.bbc.co.uk/1/hi/uk_politics/3552169.stm

Hague spelling out the mess Labour were creating, in year 2000. One bit from many relevant parts.

William Hague

They clearly can be delivered. When we say that we will run Whitehall and the whole machinery of government for £1.8bn less - we were doing it three years ago - you don't have to look into a crystal ball - you can read the book. Things don't change. Are people receiving a better service from Government departments today than three and a half years ago? No of course they're not, but there are thousands of more civil servants and the cost has gone up by nearly £2bn.

http://www.bbc.co.uk/radio4/today/reports/archive/interview/interviewoftheweektrans07.shtml

Thank Labour for your tax-credits and everything else they've brought in, Winter Fuel Allowance (non means tested) and all the other over 55/60 passes including free Tube/Tram/Rail and Bus.

Why are people earning well in excess of £50,000 a year able to claim family tax credit? So that more people feel beholden to the State for their income.

Thatcher's failure was that she never broke that mindset despite never standing on a platform of buying millions of votes by increasing spending. Every election since has been won by the party prepared to offer the most outlandish promises.

There was a very good article in the FT a few days ago saying that in the past 2 weeks, Labour MPs had promised to spend £7,000,000,000 on community projects. The politics of the UK are such that the Tories can't stand on a platform that says, "We'll not buikd a new village hall" (or whatever).

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It should be noted though that keynes advocated cyclic productive public sector investment, not just a raw injection of cash.

Yeah, like that was going to happen.

'My policy, if elected, is to raise taxes during this boom to build up savings which the next government can spend in the bust.'

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Magic money tree GDP growth, obviously.

Any fule can create 'GDP growth' by borrowing money and spending it. The hard part is not crashing the 'GDP' when you stop borrowing money and spending it, because you've created a ******** zombie economy which exists primarily to suck up government spending rather than service real demand, and will collapse when you stop feeding it BRAINS^H^H^H^Hnew debt.

Oh, hang on. That's precisely where we are today.

Any path from here to a real economy has to go through a massive GDP collapse as the zombie jobs and businesses are killed off. Anyone who whines that 'austerity reduces GDP' is just making the problem worse by zombifying more of the economy. They're the guy in the zombie movie who won't shoot the zombie because it used to be his mother, and lets it into the house, where it infects everyone else.

Edited by MarkG

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