by Paul Gregory
Times columnist Paul Krugman’s continuous railing against austerity reached a crescendo with Greece’s default.
In his What Greece Means, Krugman vents his outrage:
“What Greek experience actually shows is that while running deficits in good times can get you in trouble… trying to eliminate deficits once you’re already in trouble is a recipe for depression…Greece is the worst case, with unemployment soaring to 20 percent even as public services, including health care, collapse.”
Bankrupt economies, like Greece, need stimulus, not austerity, Krugman declares indignantly. The “austerity-induced depressions” around the European periphery are proof that Keynes was right. Germany’s Angela Merkel, her IMF-austerity allies, and world-wide lenders do not understand that we need a massive stimulus to get Greece out of this mess. They need to step up to the plate if they are good citizens of Europe (or the world).
Krugman does not fess up that Greece’sKeynesian policy of endless borrowing to fund wasteful government spending and feed massive welfare programs is exactly what got Greece in the trouble it is now in. The Greeks cannot pay their bloated public payrolls, out-of-kilter wages, and generous pensions and early retirements unless fools lend them money that will not be repaid. Even the Greeks themselves are not falling for that trick. They are too busy transferring their assets abroad. Merkel and her stingy Germans make for good scapegoats, but it’s not only them. Lenders throughout the world have shut down the lending spigot.
Liberals are gearing up to use Krugman’s Greek fable of “Keynes has won” to justify further trillions of U. S. debt and growing government to ever greater heights, as Times columnist Nicholas Kristof reveals in his In Athens, Austerity’s Ugliness:
“Europe declared war on Keynes, and Keynes is winning…If you want to know how well (Republican budget cutting) works, come visit Europe — especially Greece. Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious.”
Greece’s Keynesian orgy leaves it with two unpalatable options. One: Without further European bailouts, Greece exits the Euro zone, its drachma collapses, and its living standards fall to Bulgaria’s. Eventually, after prolonged pain its wages and prices fall enough to restore its competitiveness. Two: It meets the terms of its EU bailout agreements, it stays in the Euro zone, cuts government spending, and reduces wages and prices over an extended period of time until its competitiveness is restored.
One statistic explains why Greece must experience rising unemployment, let wages and prices fall, and fix its broken welfare system under both scenarios. German unit labor costs (the cost of producing one unit of output) have been flat over the past decade, while Greek unit labor costs soared, fueled by borrowed money from abroad. Germany (and the rest of Northern Europe) kept its costs in check by wage restraint, rising productivity, and checking the welfare state. Greece became a broken economy no longer able to compete either within the European or world market. Keynesian economics brought them to this sad state of affairs.
Greece is not a test of Keynesian economics as liberals would like to claim. Only economic illiterates could call for deficit spending when there are no lenders. In order for there to be a deficit, someone somewhere has to pay for it.
The baselessness of Krugman’s assurances that American fiscal overindulgence will not turn us into a Greece must remain the subject of another piece.
In George Bernard Shaw’s The Doctor’s Dilemma, a wastrel artist, ill from a dissolute life, consults different knighted specialists on Harley Street. Each physician diagnoses the patient as having the illness in which he is specialized.
In my version of Shaw’s play, Krugman is the titled medical doctor who has only one remedy for an illness — stimulus. MD Krugman treats a heroin addict about to go into cardiac arrest by giving him more heroin (if any is in stock). Krugman’s European protagonists recommend an extended withdrawal program to rid the patient of the heroin addiction. Which one seems more reasonable?
By the way, Shaw’s patient dies. Let’s hope Greece has a better outcome, and let’s hope no one listens to the Krugman crowd.
Paul R. Gregory is a Research Fellow, Hoover Institution Cullen Professor of Economics, University of Houston. Gregory has a regular blog http://blogs.forbes.com/paulroderickgregory/at Forbes.com