Just about everything Paul Krugman writes nowadays is in some way related to rationalizing the Obama deficits. Now, Krugman’s a smarter man than I, but I think it’s pretty clear that his partisanship drives his economic analysis these days, rather than the other way around.
Yesterday Krugman turned a case against the euro into a mind-boggling attempt to justify Greece’s fiscal shenanigans over the past few years:
Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus.
So because the U.S. ran a budget deficit of about 5% of GDP when existing public debt was about 50% of GDP, that makes it OK for Greece to run a deficit of just under 5% of GDP when existing public debt was about 100% of GDP? As for Spain and Portugal, the rigidity of their labor markets contributes to unemployment – and in Spain the popping of an enormous housing bubble has intensified the effect. He continues:
The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment.
Oh really? Tell that to economists who study the classical gold standard. From about 1880 to 1914, prices dropped on average 2% per year, even as the Second Industrial Revolution motored on. And here comes the inevitable payoff:
The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.
Because everything has to relate back to defending the U.S. government’s unconscionable fiscal excesses. If Krugman really thought monetary pump-priming is always necessary to get a local economy back on track, he would favor abolishing the dollar and breaking the U.S. up into optimal currency areas.
More to the point, Krugman’s (lack of) concern about budget deficits is strangely selective. Back in 2004, he castigated the Bush Administration for “enormous” budget deficits and “irresponsible” tax cuts. So much for the objectivity of the scholar.