Paul Krugman claimed in his New York Times op -ed article today that Republicans have mischaracterized what has happened in Europe to justify their own austerity program of significant budget cuts to reduce the national debt rather than monetizing it. He complained that Congressman Paul Ryan, who delivered the Republicans’ response to President Obama’s spend-by-another-name State of the Union Address, had appropriated Europe’s debt problems on behalf of their own agenda, “never mind the fact that events in Europe actually point the other way.”
Krugman started losing the argument by the third paragraph of his column when he conceded that the Republicans were right about Greece, where dithering on dealing with their significant deficit problem led to their economic crisis. So score one for Paul Ryan and the GOP.
Krugman skipped entirely over Portugal, evidently because its economic plight also supports the Republicans’ thesis. Portugal has been in deficit since at least 1992, reaching a pre-housing bust high in 2005 of net borrowing by the government as a percentage of its gross domestic product – 6.1 percent. That was even more than Greece’s 5.2 percent for the same year. So score another point for Paul Ryan and the GOP.
And to spare Krugman further embarrassment, we won’t even get into other European countries such as France.
Suffice it to say that economist Robert Samuelson was much closer to the mark than Krugman in his Washington Post column:
Most European economies suffer from the ill effects of some combination of easy money, unsustainable social spending and big budget deficits. Europe’s challenge is no longer just economic. It’s also social and political. Cherished values and ideals are under assault. The euro, intended to nurture unity, has bred discord, as countries assign blame and argue over sharing costs. The social contract is being rewritten, with government benefits and protections being cut.
Krugman spent the bulk of his column entitled “Their Own Private Europe” on Ireland and Britain, in order to purportedly debunk the GOP thesis that unchecked deficit spending on unnecessary government programs leads to economic crisis. Krugman claimed that the experience in Ireland or Britain
actually refutes the current Republican narrative
Lets start with Ireland, where Krugman may be partially right. Before Ireland had to deal with its bank melt-down, it was running a budget surplus. From 1987 to 2000, annual economic growth averaged 6.8 percent. Unemployment had fallen from 16.9 percent to 4.3 percent. Then the housing bubble burst, leaving Irish banks in dire straits.
Krugman blamed Ireland’s problems on “out-of-control banks,” which “ran wild during the good years.” When the bubble burst, revenue dried up and the deficit surged as the government scrambled to save the reckless banks from ruin. Krugman concluded that the lesson to be drawn from Ireland’s experience is better bank regulation, not cuts in government spending.
Krugman is half right, which means he is also half wrong. Bailing out the banks did precipitate Ireland’s deficit problems. But the question is why the Irish government decided to bail out their out-of-control banks rather than let the marketplace punish the losers or turn to the European Union for more targeted assistance at that time.