Comments on ‘The Austerity Delusion’ by Paul Krugman (Chapter 1 of 4)

Today, the Guardian released Krugman’s ‘long read’ on the austerity delusion. Here is my breakdown on chapter 1 of 4 in Krugman’s article:

Austerity is the policy of reducing government budget deficits, thereby reducing (fiscal) spending through lower government spending and/or tax hikes. Austerity is generally not popular with its citizens as increased short-term unemployment is expected.

As a result of the media, we have developed a misconception on the economic and political situation in Greece. Krugman identifies that “Greece is now seen as it should have been seen from the beginning – as a unique case, with few lessons for the rest of us.” In fact, a key lesson in Krugman’s textbook, International Economics: Theory and Policy, is highlighted through chapters 13-19 and discusses the importance of having fiscal and monetary (unless in a monetary union) autonomy, such that “It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money – they can always print more.” However, Krugman doesn’t fully explain the misnomer of quantitative easing when mentioning “Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary.

It was always about zero.” Krugman discusses the direction of monetary policy and what has generally been accepted in terms of interest rates, thereby ushering in a new interest rate environment (as previously discussed). It appears that our central bankers are going to run out of ‘policy tools’, especially non-conventional tools, such that “Still, there can’t be much room for sub-zero rates. And if cutting rates all the way to zero isn’t enough to cure what ails the economy, the usual remedy for recession falls short.

It’s true that you can’t run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it’s foolish and destructive to worry about deficits when borrowing is very cheap and the funds you borrow would otherwise go to waste.” This supports the previous article highlighted from EJ Insights that implies a key fact resulting from an interest-rate hike by the US Fed, “the historical ratio of three-month treasury yield versus monetary base/nominal GDP shows that if the short-term yield returns to the normal level of 2 percent, the Fed will have to contract as much as 50 percent of its assets, which is equivalent to US$2 trillion and represents over 12 percent of its GDP.

Therefore, should unconventional monetary policy begin a trend towards teaching unconventional economic thinking? As Krugman highlights, while unfortunate, “the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered.” As a result, one should question whether neo-Keynesian thinking should continue to prevail, as Farrell and Guiqqin in The Rise and Fall of Keynesianism During the Economic Crisis evaluate, and Professor Ha-Joon Chang of Cambridge University in this Youtube video, who concludes that, “there is some re-thinking, but… there is frankly too much money, too much power, and too much intellectual prestigious stake for (this current thinking) to go away.”

Furthermore, should non-unconventional fiscal situations, that may not be considered layman, be delivered to citizens in layman terms? “Part of the answer is that politicians were catering to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances.” However, if this is considered non-layman knowledge, should politicians exploit this? Krugman in his writing, op-ed pieces, and even textbooks never backs down on his criticism of politicians. A slight distaste is obvious, in his comments on “When John Boehner, the Republican leader, opposed US stimulus plans on the grounds that “American families are tightening their belt, but they don’t see government tightening its belt,” economists cringed at the stupidity.

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