Krugman Laments Austerity

Krugman's Sunday blog post is entitled "Lost Decade, Here We Come". In this post he laments that many members of the G-20 have abandoned fiscal stimulus and commenced with fiscal austerity (ie., cutting deficits). He argues that governments should be pouring money into economies now and cutting deficits at some future date. Of course, anyone who has been following the recent travails of Greece, Spain, and Portugal can tell you that things are not so simple: Investors are reluctant to lend money to countries with excessive debts and deficits. Sometimes fiscal stimulus is not an option. Krugman seems to suggest that if countries had only outlined credible deficit reduction policies for the future, then markets would be more forgiving. I am skeptical of this view. Greece did exactly that to no avail, though perhaps Greece's extreme indebtedness makes it a special case. The American stimulus bill already accomplishes what Krugman is talking about: it stimulates the economy now, and automatically reduces spending in the future as it naturally expires.

Krugman, however, wants even more stimulus. He condemns "deficit hawks" who want near-term spending cuts as guilty of "utter folly." Europe's debt crisis is not a harbinger of things to come in the United States, Krugman asserts. Rather, he attributes the European turmoil to the unfortunate condition of being part of the Euro-zone. It is true that until a few weeks ago, being a member of the Euro-zone did present a special challenge: individual members could not just print Euros to solve fiscal problems as the United States and Japan can do. However, the E.C.B. rendered that point irrelevant when it began creating Euros to buy European government debt a couple weeks ago. Europe can print money too, it turns out, but is still mired in fiscal and economic problems. Krugman's argument that Europe is some sort of especially tough case that is not relevant to the United States is unconvincing. A loss of investor confidence in America's willingness and ability to repay its obligations could be catastrophic for the global economy. We should proceed very cautiously going forward. Deficits should be reduced and spending should be focused on areas that will lead to long-term economic growth: infrastructure, energy independence, and research and development would be good places to start.