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PORTSIDE  March 2012, Week 2

PORTSIDE March 2012, Week 2

Subject:

What Greece Means

From:

Portside Moderator <[log in to unmask]>

Reply-To:

[log in to unmask]

Date:

Mon, 12 Mar 2012 21:43:42 -0400

Content-Type:

text/plain

Parts/Attachments:

Parts/Attachments

text/plain (131 lines)

What Greece Means

By Paul Krugman NY Times op-ed:  March 12, 2012

http://www.nytimes.com/2012/03/12/opinion/krugman-what-greece-means.html?nl=todaysheadlines&emc=edit_th_20120312

So Greece has officially defaulted on its debt to
private lenders. It was an "orderly" default,
negotiated rather than simply announced, which I guess
is a good thing. Still, the story is far from over.
Even with this debt relief, Greece -- like other
European nations forced to impose austerity in a
depressed economy -- seems doomed to many more years of
suffering.

And that's a tale that needs telling. For the past two
years, the Greek story has, as one recent paper on
economic policy put it, been "interpreted as a parable
of the risks of fiscal profligacy." Not a day goes by
without some politician or pundit intoning, with the
air of a man conveying great wisdom, that we must slash
government spending right away or find ourselves
turning into Greece, Greece I tell you.

Just to take one recent example, when Mitch Daniels,
the governor of Indiana, delivered the Republican reply
to the State of the Union address, he insisted that
"we're only a short distance behind Greece, Spain and
other European countries now facing economic
catastrophe." By the way, apparently nobody told him
that Spain had low government debt and a budget surplus
on the eve of the crisis; it's in trouble thanks to
private-sector, not public-sector, excess.

But what Greek experience actually shows is that while
running deficits in good times can get you in trouble --
which is indeed the story for Greece, although not for
Spain -- trying to eliminate deficits once you're
already in trouble is a recipe for depression.

These days, austerity-induced depressions are visible
all around Europe's periphery. Greece is the worst
case, with unemployment soaring to 20 percent even as
public services, including health care, collapse. But
Ireland, which has done everything the austerity crowd
wanted, is in terrible shape too, with unemployment
near 15 percent and real G.D.P. down by double digits.
Portugal and Spain are in similarly dire straits.

And austerity in a slump doesn't just inflict vast
suffering. There is growing evidence that it is
self-defeating even in purely fiscal terms, as the
combination of falling revenues due to a depressed
economy and worsened long-term prospects actually
reduces market confidence and makes the future debt
burden harder to handle. You have to wonder how
countries that are systematically denying a future to
their young people -- youth unemployment in Ireland,
which used to be lower than in the United States, is
now almost 30 percent, while it's near 50 percent in
Greece -- are supposed to achieve enough growth to
service their debt.

This was not what was supposed to happen. Two years
ago, as many policy makers and pundits began calling
for a pivot from stimulus to austerity, they promised
big gains in return for the pain. "The idea that
austerity measures could trigger stagnation is
incorrect," Jean-Claude Trichet, then the president of
the European Central Bank, declared in June 2010.
Instead, he insisted, fiscal discipline would inspire
confidence, and this would lead to economic growth.

And every slight uptick in an austerity economy has
been hailed as proof that the policy works. Irish
austerity has been proclaimed a success story not once
but twice, first in the summer of 2010, then again last
fall; each time the supposed good news quickly
evaporated.

You may ask what alternative countries like Greece and
Ireland had, and the answer is that they had and have
no good alternatives short of leaving the euro, an
extreme step that, realistically, their leaders cannot
take until all other options have failed -- a state of
affairs that, if you ask me, Greece is rapidly
approaching.

Germany and the European Central Bank could take action
to make that extreme step less necessary, both by
demanding less austerity and doing more to boost the
European economy as a whole. But the main point is that
America does have an alternative: we have our own
currency, and we can borrow long-term at historically
low interest rates, so we don't need to enter a
downward spiral of austerity and economic contraction.

So it is time to stop invoking Greece as a cautionary
tale about the dangers of deficits; from an American
point of view, Greece should instead be seen as a
cautionary tale about the dangers of trying to reduce
deficits too quickly, while the economy is still deeply
depressed. (And yes, despite some better news lately,
our economy is still deeply depressed.)

The truth is that if you want to know who is really
trying to turn America into Greece, it's not those
urging more stimulus for our still-depressed economy;
it's the people demanding that we emulate Greek-style
austerity even though we don't face Greek-style
borrowing constraints, and thereby plunge ourselves
into a Greek-style depression. 

___________________________________________

Portside aims to provide material of interest to people
on the left that will help them to interpret the world
and to change it.

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