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Krugman demolishes the pro-austerity arguments by listing the facts.


feargach

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The suicidal pro-austerity mania sweeping the globe rests its entire case on six locally-specific incidents involving mainly small economies which enjoyed recovery despite a major austerity programme.

Krugman looks at the six and spots that in all of the cases, there was a massive special, local circumstance that cannot apply to the current world.

Fiscal Fantasies - Paul Krugman Blog - NYTimes.com

We are one of these example, as it happens: 1987-89 - our boom was thanks to a huge devaluation rather than the McSharry cuts frenzy. Verdict: Of no relevance to current global situation.

The rest:

Canada 1994-1998: the austerity programme of that time took place in a boom environment, as interest rates were falling. There is no global boom and global interest rates cannot fall as they're effectively at zero. Verdict: Of no relevance to current global situation.

Denmark 1982-86: interest rates were falling by 10 % points! I repeat for the uninformed: this cannot happen now unless we get banks to PAY you 9% to borrow money. as interest rates were falling. Verdict: Of no relevance to current global situation.

Finland and Sweden 1992-2000: in this period the small nations (next to an oil giant, replete with free-spending vulgar millionaires) developed a huge current account surplus (12% in Finland's case). The world can only manage this if we make contact with aliens and somehow persuade them to buy lots of our stuff. Verdict: Of no relevance to current global situation.

So there you have them: the exhaustive list of all the austerity programmes in economic history that did not coincide with massive economic collapses. Every other austerity programme ever came with a massive bust of misery and destruction of wealth and productive capacity lying idle and falling apart.

And as Krugman shows, the handful that got lucky were all down to a stroke of locally-applicable good fortune that just cannot apply today, in this planet.
 


Mossy Heneberry

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May I suggest you go and read this article from the Sindo.

"The estimated cost of interest on the national debt will be approximately €5.75bn in 2011 and €7.5bn in 2013. Based on these estimates and the projections for tax revenue for the years to 2014 as set out in budget 2010, it is forecast that the proportion of tax revenue that will be accounted for by interest payments on the national debt will amount to 17.5 per cent in 2011 and 20 per cent in 2013," he said.
Our nation will crumble as debt mountain rises - Analysis, Opinion - Independent.ie
 

seenitallb4

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We were close to touching this on another thread when it was suggested that we needed some means of flushing out the debt and resetting our economy as a n alternative to mass austerity. I would hope that the more knowledgeable amongst us could elaborate on this idea, assess its suitability as a way forward, and perhaps speculate on how it might work.
 

toughbutfair

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So Haughy/mcsharry turned around our economy but not by cuts but by devaluation?

To back up his case, he must show how devaluation alone has always turned around economies as messed up as our one in 1987.

Foolish article by him.
 

feargach

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So Haughy/mcsharry turned around our economy but not by cuts but by devaluation?

To back up his case, he must show how devaluation alone has always turned around economies as messed up as our one in 1987.

Foolish article by him.
Hahahaha! Somebody's being foolish and utterly wrong here: it's either the Nobel Prize-winning economist or the anonymous rightwing internet poster.

That's a tough one!

He doesn't have to "defend" the idea that austerity is useless: the very notion that austerity is conducive to an expansion in economic activity is itself ridiculous!

Austerity, by its nature, is the act of reducing the availability of the means of exchange necessary for economic activity to take place.

Let me rephrase TBF's question to highlight how silly it is:

"Where does Krugman provide any proof that cutting down on calorie intake leads to reduced obesity?"

See what he's missing? Krugman doesn't NEED to prove that McSharry's cuts did nothing to boost Ireland's exports, because nobody increases their purchases of Country X's products simply because Country X happens to reduce its deficit.

The notion that foreign people in 1988 upped their buying of our exports because they liked McSharry shutting down hospitals is so ludicrous that no sane person even considers it.

The only other possible candidate explanations for our export boom in 1988 is that our products leapt upwards in quality that year (cough), or the fact that the cost in Sterling, Deutschmark and Franc had suddenly fallen.
 

Cassandra Syndrome

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We were close to touching this on another thread when it was suggested that we needed some means of flushing out the debt and resetting our economy as a n alternative to mass austerity. I would hope that the more knowledgeable amongst us could elaborate on this idea, assess its suitability as a way forward, and perhaps speculate on how it might work.
Debt forgiveness is the only solution. Its impossible for our GNP to outrun the debt interest, so growing our way out of this is not an option.

Feargach is right highlighting the austerity issue. It will make National Income shrink further and the debt burden will increase in percentage terms to ad infinitum. Bankruptcy is the end result of this.
 

Cassandra Syndrome

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So Haughy/mcsharry turned around our economy but not by cuts but by devaluation?

To back up his case, he must show how devaluation alone has always turned around economies as messed up as our one in 1987.

Foolish article by him.
Back in 1987 out GNP was low and had a high propensity to grow. Our total debt was less than 200% of GNP.

Today our income cannot grow and even if it did it would have to outrun the massive interest growing on 600 Billion Euro of Debt which is 500% of our income.

The only solution is debt forgiveness.
 

MPB

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Back in 1987 out GNP was low and had a high propensity to grow. Our total debt was less than 200% of GNP.

Today our income cannot grow and even if it did it would have to outrun the massive interest growing on 600 Billion Euro of Debt which is 500% of our income.

The only solution is debt forgiveness.
+1,

That or an inevetable default.

Same solutions, different consequences. Personally I would prefer to default on 80 billion than 150 billion.

But renegotiating a debt reduction or restructure would be altogether better for the country as a whole.

It would also help if we did not choose to repay the debts of a Private Merchant Bank and silly dud Banks run for the benefit of their Chief Execs. That is, in itself, a saving of almost 40 billion.
 

feargach

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Debt forgiveness is the only solution. Its impossible for our GNP to outrun the debt interest, so growing our way out of this is not an option.

Feargach is right highlighting the austerity issue. It will make National Income shrink further and the debt burden will increase in percentage terms to ad infinitum. Bankruptcy is the end result of this.
Is this a recent change of mind, or have you always thought this?
 

Squire Allworthy

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Feargach is right highlighting the austerity issue. It will make National Income shrink further and the debt burden will increase in percentage terms to ad infinitum. Bankruptcy is the end result of this.
But surely what is needed here is austere government spending and encouragement of sectors that create wealth to invest.

Even if that is the approach there is a limit on how quickly you can reduce government activity as a percentage of the overall economy.

Debt restructuring is inevitable and many debts will have to be written off. That is reality and the sooner that we come to terms with that and allow it to happen the better. It is either that or simply take measures that would allow the debt to be inflated into oblivion.
 

Mossy Heneberry

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But surely what is needed here is austere government spending and encouragement of sectors that create wealth to invest.

Even if that is the approach there is a limit on how quickly you can reduce government activity as a percentage of the overall economy.

Debt restructuring is inevitable and many debts will have to be written off. That is reality and the sooner that we come to terms with that and allow it to happen the better. It is either that or simply take measures that would allow the debt to be inflated into oblivion.
For that to work, wages would have to be greatly increased over the rate of inflation???
 

patslatt

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The Asian 1990s crisis

The suicidal pro-austerity mania sweeping the globe rests its entire case on six locally-specific incidents involving mainly small economies which enjoyed recovery despite a major austerity programme.

Krugman looks at the six and spots that in all of the cases, there was a massive special, local circumstance that cannot apply to the current world.

Fiscal Fantasies - Paul Krugman Blog - NYTimes.com

We are one of these example, as it happens: 1987-89 - our boom was thanks to a huge devaluation rather than the McSharry cuts frenzy. Verdict: Of no relevance to current global situation.

The rest:

Canada 1994-1998: the austerity programme of that time took place in a boom environment, as interest rates were falling. There is no global boom and global interest rates cannot fall as they're effectively at zero. Verdict: Of no relevance to current global situation.

Denmark 1982-86: interest rates were falling by 10 % points! I repeat for the uninformed: this cannot happen now unless we get banks to PAY you 9% to borrow money. as interest rates were falling. Verdict: Of no relevance to current global situation.

Finland and Sweden 1992-2000: in this period the small nations (next to an oil giant, replete with free-spending vulgar millionaires) developed a huge current account surplus (12% in Finland's case). The world can only manage this if we make contact with aliens and somehow persuade them to buy lots of our stuff. Verdict: Of no relevance to current global situation.

So there you have them: the exhaustive list of all the austerity programmes in economic history that did not coincide with massive economic collapses. Every other austerity programme ever came with a massive bust of misery and destruction of wealth and productive capacity lying idle and falling apart.

And as Krugman shows, the handful that got lucky were all down to a stroke of locally-applicable good fortune that just cannot apply today, in this planet.
Weren't there more examples than just Krugman's handful of small countries recovering in the face of austerity? The Asian banking crisis in the 1990s was followed by brutal austerity imposed by the IMF.

Keynesianism was discredited in the 1970s by runaway government spending that ultimately had to be financed by inflation when income tax rates reached their limits.

There is a trap in Keynesian logic that says you can spend yourself rich when resources and capacity are idle.Keynesian stimulus leads to inflation as economic capacity reaches full utilisation when governments fail to phase out Keynesian stimulus.

Then inflation erodes economic demand by undercutting purchasing power,which increases unemployment. That's known as stagflation,poor or no growth with inflation.New bouts of stimulus can help reduce unemployment,partly from the stimulus and partly from a drop in real wages.

This drop in real wages occurs as long as inflation expectations of workers and others remain the same even while inflation rates keep rising. But eventually workers become aggressive in their wage demands,which leads to a wage driven inflation spiral. The wave of crippling strikes in 1970s Britain when the trade unions looted the economy illustrates such labour militancy. This rise in real wages causes unemployment to rise.

Ultimately, inflation reaches punishing levels in high single digits and double digits and becomes socially destabilising as people on fixed incomes and in jobs with little wage bargaining power suffer losses of purchasing power. At that point,public opinion favours austerity and tight money. By then,bond markets have adjusted to inflation through rapidly rising interest rates.

Increasing inflation at this stage prevents economic growth because great uncertainty about interest rates,wages,rents and other costs make it very difficult for businesses to plan ahead for expansion.

At present,there is no serious threat of inflation judging by interest rates but bond market opinion could prove volatile as shown in the sovereign debt crisis. The fear is that ageing populations requiring more social welfare and health care plus declining work forces in many EU countries and Japan may prevent sufficient economic growth to service the debt.
 
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PrinceMax

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If the EU pursues austerity measures and the US doesn't, does that work out really well for the EU, in that we get to reduce our deficits while at the same time having a continuing increase in demand for European products abroad?
 

sandar

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no it rests on counter cyclical economic theory a theory invented by keynes of whom krugman is apparently a follower. the canda example you highlight abogve is also an example of counter cyclical economics.
same with sweden.

the austerity programme coemas after the collapse, bot before it, if it is done right
 

feargach

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Weren't there more examples than just Krugman's handful of small countries recovering in the face of austerity? The Asian banking crisis in the 1990s was followed by brutal austerity imposed by the IMF.
Again, the instances in the OP are the sole occasions when austerity was not met with immediate, crushing collapse. Ergo, on all other occasions of austerity, including the 1998 Asian instances, immediate collapse took place as a result of austerity, with recovery taking a decade and usually failing to return to pre-austerity standards within a reasonable time frame.

Then inflation erodes economic demand by undercutting purchasing power,which increases unemployment. That's known as stagflation,poor or no growth with inflation.New bouts of stimulus can help reduce unemployment,partly from the stimulus and partly from a drop in real wages.
How can you not be aware that 1970s-style stagflation is infinitely preferable to the present situation in even the best-off EU nation, let alone us?

This drop in real wages occurs as long as inflation expectations of workers and others remain the same even while inflation rates keep rising. But eventually workers become aggressive in their wage demands,which leads to a wage driven inflation spiral. The wave of crippling strikes in 1970s Britain when the trade unions looted the economy illustrates such labour militancy. This rise in real wages causes unemployment to rise.
Assuming all that were true and not misleading, a 70s-style drop in real wages must surely be preferable to the present outright wipe-out of jobs.

You keep saying we mustn't stop having TB because of the danger of catching a cold.

70's style stagflation is a paradise state that we can only aspire to in our daydreams, compared to where we are now.

Ultimately, inflation reaches punishing levels in high single digits and double digits and becomes socially destabilising as people on fixed incomes and in jobs with little wage bargaining power suffer losses of purchasing power. At that point,public opinion favours austerity and tight money. By then,bond markets have adjusted to inflation through rapidly rising interest rates.
So the status quo of having no wage at all, and progressively cutting welfare down to soup kitchen levels, is somehow superior to having a job with many multiples the purchasing power of welfare? I'm not buying.
 

Mossy Heneberry

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How can you not be aware that 1970s-style stagflation is infinitely preferable to the present situation in even the best-off EU nation, let alone us?

What were the interest rates like back then? Didn't they go to 21.5% in the USA? This increase the cost of borrowing for businesses and record unemployment. Also consumers with debt and mortgages suffered.
 

feargach

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What were the interest rates like back then? Didn't they go to 21.5% in the USA? This increase the cost of borrowing for businesses and record unemployment. Also consumers with debt and mortgages suffered.
Of course they suffered, but not in comparison to how American people (let alone us, who are much worse off in all ways except healthcare) are suffering today.

2010.
Is.
Much, much, much.
Worse.
Than.
Any.
Year.
In.
The.
1970s.

You have to understand this.
 

Mossy Heneberry

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Of course they suffered, but not in comparison to how American people (let alone us, who are much worse off in all ways except healthcare) are suffering today.

2010.
Is.
Much, much, much.
Worse.
Than.
Any.
Year.
In.
The.
1970s.

You have to understand this.
Yes I do understand that. But if we end up with stagflation 2010/11/12 will be made even worse that what is happening now. Consider the fact that so many people are up to their eyes in debt.
 

patslatt

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Stagflation threatened to become hyperinflation in the 197os

Again, the instances in the OP are the sole occasions when austerity was not met with immediate, crushing collapse. Ergo, on all other occasions of austerity, including the 1998 Asian instances, immediate collapse took place as a result of austerity, with recovery taking a decade and usually failing to return to pre-austerity standards within a reasonable time frame.



How can you not be aware that 1970s-style stagflation is infinitely preferable to the present situation in even the best-off EU nation, let alone us?



Assuming all that were true and not misleading, a 70s-style drop in real wages must surely be preferable to the present outright wipe-out of jobs.

You keep saying we mustn't stop having TB because of the danger of catching a cold.

70's style stagflation is a paradise state that we can only aspire to in our daydreams, compared to where we are now.



So the status quo of having no wage at all, and progressively cutting welfare down to soup kitchen levels, is somehow superior to having a job with many multiples the purchasing power of welfare? I'm not buying.
You exaggerate thr extent of the economic suffering. In past 20th century austerities,people on modest wages had to suffer really painful cuts in what today would be seen as necessities.

The basic problem in the 1970s was that stagflation threatened to become permanent,with hyperinflation in double digits becoming a real possibility and a threat to democracy. Austerity through Fed Chairman Paul Volcker's early 1980s ultra high interest rates led to high unemployment and depressed capital spending but squeezed out inflation. That laid the foundation for sustainable economic recovery with very low inflation.

As for East Asian crisis,see an interesting report http://www.worldscibooks.com/economics/4534.html
 
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feargach

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Yes I do understand that. But if we end up with stagflation 2010/11/12 will be made even worse that what is happening now. Consider the fact that so many people are up to their eyes in debt.
Well if we have a replay of the 70s then a lot of people will see their incomes rise up above their debts. Obviously this can only happen if inflation includes Irish-produced and consumed goods and services. The moderate inflation of the 50s and 60s was actually necessary for Europe in order to reduce the real burden of the debt. Ireland's (private) debt burden today is similar to that faced by western Europe in 1946.
 

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