Battle Of Britain – Krugman vs. Austerity Proponents

-Submitted by David Drumm (Nal), Guest Blogger

On BBC Newsnight (video below), Nobel laureate Paul Krugman was pitted against venture capitalist Jon Moulton and Conservative MP Andrea Leadsom to discuss the merits of austerity. Krugman handily demolished their arguments. Krugman likened austerity to bloodletting, where if the patient gets sicker, even more bloodletting is called for. Krugman is in Europe on a book tour and his ideas are making headlines.

Moulton lets the cat-out-of-the-bag when he says the issue about austerity is really an issue about “too large a state.” Krugman calls him on his disingenuousness and  writes:

The austerity drive in Britain isn’t really about debt and deficits…; it’s about using deficit panic as an excuse to dismantle social programs. And this is, of course, exactly the same thing that has been happening in America.

That would be the America where politicians bemoan the deficit out of one side of their mouths while calling for tax cuts for the wealthy out of the other side. That would be the America where politicians bemoan the deficit out of one side of their mouths while calling for increases in defense spending out of the other side.

On the show, Leadsom argues that we should be “making it easier for the private sector” to create jobs. Krugman cites evidence that it is “lack of sales and not enough demand” that’s keeping businesses from expanding and the austerity policies are actually making that situation worse.

Austerity measures have been hailed by Jean-Claude Trichet, the former president of the European Central Bank, as “confidence-inspiring policies will foster and not hamper economic recovery.” Krugman calls this argument the “confidence fairy,” who will magically appear to reward the austerity policies. But after two years of austerity, the confidences fairy hasn’t materialized. A similar argument was made for Bush’s “job creating” tax cuts. Bush’s tax cuts had the desired effect: the rich got richer.

The effects of austerity are evidenced by Ireland’s 14.5% unemployment rate and Estonia’s Depression-level slump in real GDP of 18%. In Greece, Nobel economics laureate Christopher Pissarides said wealthy Greeks would benefit at the expense of poorer citizens were the country to exit the euro and reinstate the drachma. Wealthy Greeks have exported their money to other EU banks in anticipation of the return to the highly devalued drachma. Poorer Greeks need to maintain quick access to their cash.

Britain’s economy is in a double-dip recession having shrunk by 0.3% and 0.2% in the last two quarters. More bloodletting is prescribed.

H/T: Felix Salmon (Reuters), Mark Thoma (Economist’s View), Jennifer Ryan (Bloomberg Businessweek), Paul Krugman (NY Times).

42 thoughts on “Battle Of Britain – Krugman vs. Austerity Proponents”

  1. Indigo Jones,

    You’re so right.
    “In industry, the goal of competition is to put your competitor out of business. Once a firm has a monopoly, it erects barriers to competition to protect its monopoly.”

    So what do you make of the Euro econonmy. It is different nations, I know, so all mistakes are not the same. BUT, was there financial interest in the failure, ie sabotageing going on even now.

    For example, I remember when Soros broke the Swedish bank in spite of overnight 500 per cent interest. Didn’t save the kronor…..but that is a much smaller economy. Euro is larger.

  2. My money is on Krugman. The Socialism scare tactic is still being used by the Right, but it doesn’t match the facts. Government stimulus isn’t Socialism. The only way out of this mess is a combination of stimulus spending, real taxation of corporations and wealthy individuals. The corporations have an incentive to move jobs overseas. That must stop immediately.

  3. Nal,

    Here is a very interesting essay by George Soros, who says amongst many things, he gives the EU 3 months to figure it out or collapse.

    Soros of course, made his first 2 billion by predicting the collapse of the English pound.

    The essay’s first half is the nature of economic research and how it is different from actual real sciences and how it is bullshit like other bullshit junk sciences like psychology. That part is terrific and reminds me a great deal of something I might read from Feynman.

    The second half is how this relates to the future of the EU which Soros describes as a fantastic object that it used to be. The future of Europe depends on it.

    The Future of Europe, by George Soros

    George Soros Remarks, Festival of Economics, June 2, 2012

    Trento, Italy

    Ever since the Crash of 2008 there has been a widespread recognition, both among economists and the general public, that economic theory has failed. But there is no consensus on the causes and the extent of that failure.

    I believe that the failure is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.

  4. You can read a plethora of words used to describe “economy” and “government” types.

    But there is a real reason that there are different words for different types of governments/economies, such as:

    Androcracy, Aristocracy, Autocracy, Communist state, Confederation, Consociationalism, Corporatocracy, Corporatism, Demarchy, Democracy, Despotism, Empire, Ethnocracy, Fascist state, Federation, Feudalism, Garrison state, Gerontocracy, Green state, Hierocracy, Isocracy, Interregnum, Kakistocracy, Kratocracy, Kleptocracy, Kritarchy, Kritocracy, Kyriarchy, Logocracy, Matriarchy, Mediocracy, Meritocracy, Minarchism, Monarchy, Nanny state, Nation-state, Nomocracy, Noocracy, Ochlocracy, Oligarchy, Panarchism, Pantisocracy, Parliamentary state, Patriarchy, Provisional government, Plantocracy, Plutocracy, Police state, Polyarchy, Presidential, Puppet state, Republic, Socialist state, Sociocracy, Squirearchy, Stratocracy, Sultanism, Superpower, Supranational union, Synarchy, Technocracy, Thalassocracy, Theocracy, Timocracy, Tribe, Tyranny, Unitary state, Welfare state

    (Who Are The Job Creators?). Can’t you just hear the outrage when a parent beats all of her kids because just one of them did something wrong?

    Likewise, until the type of government/economy is identified by all the matching criteria, economic discussions are dick-head ideologies going around beating on something because “something is wrong”, unless and until the government structure and economic reality is grasped and laid out in both the critique and the solution.

    Just like the bulk of current talk about “reason” is 18th century in the, likewise, the bulk of economic discussion assumes a government and an economy of that same era.

    Things change.

    Our friggin’ skulls have even changed for some reason, or the lack thereof.

    Pick up on it.

  5. @bettykath

    “Why would Ford, or anyone, produce anything with no market?”

    The behavior of brand-name product markets is different than the commodity market (though oligopoly distorts both; for example, OPEC caps oil production to control prices — there’s only a functioning market where consumer demand, not producer fiat, controls price).

    Commodities are more or less undifferentiable: if you mix up grains of corn from two suppliers, you would have trouble sorting them out later. Producers (ideally) try to reduce costs and increase output to maximize profits.

    Brand-name products work differently. Coke and Pepsi sell more or less the same product and the same price. They don’t compete on cost economics, but on the clarity with which they can articulate a brand identity for their product. If you mixed up a bunch of cans of Coke and Pepsi, you could sort them out later with relative ease.

    The thing to keep i mind with brand name products is that demand is caused by supply. Nobody knew they needed an iPod until Apple started advertising them. Apple, which is notoriously secretive about their product annnouncements, arranged for the manufacture of millions of iPods before even announcing their product.

    Demand follows supply. Corporations use advertising and marketing and PR to create new desires.

    We spend more money in the US bombarding citizens with lies than teaching people how to think.

  6. Indigo Jones said “There is very little competition in industry. Mostly there is collusion (oligopoly). Monopoly and oligopoly do far more to distort market forces than government.

    Many people are under the impression that money the government takes in in taxes is taken out of the economy, whereas corporations spend their profits, but just the opposite is the case.”

    So spot on, it bears repeating.

  7. Thanks Nal.

    Krugman is one of the most brave voices who is not very afraid of getting in the faces of power when he feels he needs to.

    But there is growing awareness that our academic disciplines have some fundamental flaws that are, to say the least, WILD, because even our skulls are changing mysteriously.

  8. And the Swedish National Bank gives a “ignoble” prize in the honor of Alfred Nobel to someone who screws around with economy. Of course, I don’t understand it so that’s NOT why I’m casting comtempt on it.

    It instead is just because nobody can seem to improve its effects for the common man. And whose fault is that?
    The economists and national decision-makers or the leeches in the finance world who play games with us.

  9. Some years down the pike, we’re going to get the real solution, which is going to be a combination of death panels and sales taxes.

    -Paul Krugman

  10. Bron,
    “Production is what allows consumption, Henry Ford first had to manufacture the automobiles for them to be sold.”

    chicken and egg? I don’t think so.

    Why would Ford, or anyone, produce anything with no market? If I were putting together a business plan, the first thing I would look at is what, exactly, is my product. In Ford’s case, it was a mass produced auto. Second I would need to specify my market: who and how many want my product. If there is no market because my potential customers can’t afford it, I don’t have a viable plan.

    Ford saw that his product was desirable, but even his workers couldn’t afford it. In order to make money for himself, he needed many, many people to buy his cars. By paying his workers well, he created the market and the demand. Note that his production was diddly-poop until he created the market. Now his workers had more disposable income, partly used to buy one of his cars (great pr), but also for other items which helped other businesses – shoes, clothing, ice boxes or refrigerators, tourism. More people working in those businesses with more disposable income to spend on Ford’s autos.

    Our economy isn’t in the pits because there are no products, it’s because people can’t afford to buy anything but essentials. If they don’t buy what’s already on the shelves, production is slowed => workers laid off = less disposable income and even less buying.

    Should we have Romney, Trump, Gates, et. al. buy more cars and houses? Should Ann Romney buy more $1000 t-shirts? Or Ms Eastwood another $100,000 handbag? They already have more than they can possibly use. OTOH, if they were taxed such they paid a bit more, maybe by closing some tax loopholes, or if a small tax was added to the purchase of stocks and bonds, and that money used to repair the infrastructure – bridges, water lines, separation of sewer and water runoff lines, etc. maybe those workers would have enough disposable income to get the production lines running again ( – in China. : ( )

  11. For the Americans without memoriy: John Maynard Keynes and John Kenneth Galbraith. Please Google them. Krugman is a voice and an echo and he is correct to a point. When Merkel calls for some Greek austerity she points to retirment at age 50 and defaults on bond holdings. She did not tell them to cease building roads and bridges. On our side of the pond, the Willard in our midst will cut taxes for the wealth and add 100.000 troops, build more ships, more planes and feed his military industrial Koch Brothers Haliburton complex.

  12. I’m no huge fan of Krugman, but I think a big part of the problem with the economic discourse in this country is that most Americans try to reason about he macroeconomic effects of industry by analogy to the “lemonade stand” model of entreprenurial capitalism. The two are an ocean apart.

    It is important to talk about industry and monopoly because, while small busineses are top employers, most people they employ are still struggling financially. Most money in the economy is in the business sector, most of that is in finance, and after that, most is in industry. By the time of the panic of 1873, entreprenurial capitalism had ceased to be a driving force in the US economy, though the myth is still alive and well.

    In industry, the goal of competition is to put your competitor out of business. Once a firm has a monopoly, it erects barriers to competition to protect its monopoly. Microsoft was fined $2 bn by the EU for a decade of operating in violation of anti-trust law. Because nobody goes to prison, they have no incentive to obey the law, and treat the fine as just another cost of doing business.

    And they’re not alone: Intel controls over 80% of the market for CPUs. ADM processes 50% of the ethanol in the US. Most cities have exactly one cable TV provider. 90% of soy grown in the US is Monsanto Roundup Ready.

    There is very little competition in industry. Mostly there is collusion (oligopoly). Monopoly and oligopoly do far more to distort market forces than government.

    Many people are under the impression that money the government takes in in taxes is taken out of the economy, whereas corporations spend their profits, but just the opposite is the case.

    Whatever the government takes in in taxes gets spent. Corporations, on the other hand, just feed the fractional reserve system. Right now, Apple is sitting on $100 bn cash. That’s an annual median income for 2 million American families. And that’s just one corporation. That money is just oiling the gears of the Federal Reserve system.

  13. Bron, “What you see with public works is a bridge getting built what you dont see is that money comes at the expense of something else that private individuals would purchase, a new car, a new pair of shoes, a new house.”

    I see you’ve bought into Romney’s tax plan – increase taxes on the lower middle class and reduce taxes on his. How about reducing taxes on those who really need the money to purchase a used car, new shoes, a house? btw, the house doesn’t have to be new, used is fine, 2000 sq feet is more than ample and smaller than a multi-car garage. Then look for those who already have multiple cars (a truck, a jeep?, a couple of caddies), a closet full of shoes, and several houses. These are the folks who could handle a bigger tax or fewer tax loopholes without it hindering their lifestyle. Let them build the bridge.

  14. ARE:

    Production is what allows consumption, Henry Ford first had to manufacture the automobiles for them to be sold.

    Paying good wages is a good idea and maybe if the government reduced the amount of taxes and regulations, higher wages could be paid.

    I get taxed so much, and I am just a small business, I could afford to hire another person and buy them a new computer. But I cant because I need to make something for my efforts. Small business owners account for a good portion of job creation in this country, we make less than most people in management positions in government and we use up our equipment before we replace it, government just buys whatever they want without any thought and then sells perfectly good products for much less than they are worth to make way for new products they could have kept using.

    They do this with our money, they also take expensive trips to Las Vegas, I have never been there nor taken employees.

  15. Nal:

    I know everyone or most everyone on this blog is enthralled with socialism but it doesnt work and Krugman is wrong and so was Keynes concerning stimulus.

    Any money you take for stimulus comes from money that would have been used by the private sector. Krugman puts spending ahead of production but spending implies production not the other way round.

    What you see with public works is a bridge getting built what you dont see is that money comes at the expense of something else that private individuals would purchase, a new car, a new pair of shoes, a new house.

    What people are doing now, puckering up, starting to save and reducing consumer debt, is the right thing to do. It is savings that allows production not spending.

    World War II did not get us out of the depression, think rationing of gasoline, food, steel, aluminum, silk, etc..

    As a final thought check out Latvia Lithuania and Estonia, they are doing well because they have rejected Krugman and his ideas.

    “PLUNGING unemployment, rocketing growth, soaring exports and a budget surplus: that is the story of Estonia as it bounces back from a precipitous economic collapse. This burst of good news shows not only the virtues of flexibility and austerity (a sensitive subject, as other euro countries taste the same medicine); it also gives heart to Latvia and Lithuania.”

  16. Krugman should use Henry Ford as an example of what to do. Ford said that he paid the highest wages possible so that his workers could afford to buy the products that they produce. Without demand, no business will start or expand. I know of NO emplolyer who simply hires because he has a lot of money in the bank and wants to provide jobs for more people.

    Too bad conservatives have such short memories and lack logic in their pronouncments. At least they got honest when they said their real intent is to drive down state spending and damn the consequences. They are simply liars and crooks, who care nothing about their whole society and just look after their own class.

  17. Just how has Europe tried austerity?

    Government budgets aren’t down in any meaningful way, and in some countries are actually increasing. At the same time, taxes are soaring. How is that austerity?

    Even if Krugman were right (you might want to check with Japan first), where would the stimulus money come from?

  18. Thanks for this Nal. Paul Krugman (along with Matt Taibbi and Glenn Greenwald) are possibly the only people currently making any sense.

    BTW, there is no US equivalent (in quality) of Newsnight or Jeremy Paxman.

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