Nobel Prizing Winning Nutcase?

Nobel Prize Winner Paul Krugman

Who is Paul Krugman?

He has achieved more and accumulated enough accolades to fill ten lifetimes. How can someone so brilliant go so awry?

Winning the Nobel Prize in economics in 2008 and famed as a gifted researcher, educator, author and New York Times economic pundit over several decades must have finally pushed him over the edge.

What is with politicized Keynesian macroeconomists?

The word “debt” has lost all meaning to them. They treat it like a dirty 4-letter word. Its heresy to even suggest trying to get debt under control by… Gasp!… cutting spending.

They must think that if you ignore debt long enough it will magically inflate away.

Such seems the case in Paul Krugman’s latest opinion piece:
Legends of the Fail
– Paul Krugman, New York Times, 11/10/2011

The Krugman Argument

He doesn’t say so outright, but Krugman seems to be saying the European sovereign debt crisis is essentially a myth.

Apparent, for him, there are no conditions where social welfare spending can cause unmanageable debt growth. Apparently, for him, you are charged high interest rates because of the currency you use instead of being a bad credit risk and owe lots of money.

In support of this view Krugman says:

  • Other country’s have expensive social programs without debt problems
  • High interest borrowing rates are caused by borrowing in foreign currencies

That is his entire argument in a ‘nutshell’… so as to speak. 😉

Debt, Deficits and GDP Ratios

Professor Krugman, I’m not a Nobel Prize winner like you, but might it be that part of the reason Germany, for example, can afford more expensive social programs is because their government’s total debt-to-GDP ratio is only 81.3% compared to Greece at 149.5% and Italy at 121.5%? I saw those debt figures in Thursday’s New York Times published the same day as your article. You might wanna check them out.

All the other countries you mentioned with expensive social welfare programs have very low government debt-to-GDP ratios. They can afford high spending on social welfare programs because they aren’t neck deep in debt already.

Even more important is how much of a country’s GDP is gobbled up by government spending beyond it’s means… their deficit-to-GDP ratio.

Greece’s deficit-to-GDP level was -9.8% in 2010 and Spain’s was -8.5%. Counting Ireland’s -12.2%, they are by far the highest runaway spenders in Europe. Italy’s deficit spending is high but much more manageable at -5.4%.

What you should be telling us is how the other countries are able to keep their debt-to-GDP and deficit-to-GDP ratios low AND fund higher cost social welfare programs. That would be helpful. But you don’t!

Borrowing in your own Currency

I don’t understand how borrowing in your own currency helps keep interest rates lower but I’m sure there are perfectly valid economic reasons for it.

In your article you make this blanket statement:

the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency

Then you list examples, not economic reasoning why the statement is true.

Japan is your prime example. Japan has an outrageously high 250% debt-to-GDP ratio and an outrageously low 1% interest rate.

If I’m not mistaken, Japan is the only country in the world whose currency is the yen.

If Japan’s interest rates are low because it is borrowing in its own currency then that can only mean that there must be much greater real wealth within Japan than it’s gross debt. In other words, Japan is a very intrinsically rich country compared to it’s government sovereign debt.

That makes sense though. It is, after all, a kinda smallish country yet has the 3rd largest economy in the world. Its citizens are industrious and self-reliant. It is a special case. The government has to be borrowing from its own much greater intrinsic wealth and getting it at bargain basement rates.

Where is the hidden intrinsic wealth within Greece, Spain and Italy? Maybe they can tap that for low interest loans.

A Moot Point

But isn’t currency a moot point in the case of those countries, anyway? They are already borrowing in their own currency – the Euro.

They don’t  have their own currencies. They were borrowing in Euros at low interest rates years before the sovereign debt problem raised its ugly head.

You flatly state that “Spain and Italy in effect reduced themselves to the status of third-world countries” simply by joining the EU. You say for unstated reasons that they aren’t borrowing in their own currencies. Apparently, one country’s Euro is different from another’s.

Italy has the 3rd biggest economy in the EU and Spain has a smaller economy. If they became 3rd world countries by joining the EU then why aren’t the rest 3rd world countries to?

Since all 17 EU countries use the same currency then why don’t they all have similar interest rates? Why are interest rates different among the EU states?

Debt and Interest Rates

Consider this radical possibility. Maybe… just maybe… the interest rates paid by the 17 individual EU members varies more based on how bad of a credit risk they are than what currency they borrow in, just like us regular folks!

Perhaps in your ivy league Princeton classrooms that type of logic is… welll… just to easy for your students to grasp.

For my drachmas, I’d say being a bad credit risk trumps currency type every day of the week and twice on Sundays!

Conclusions

Keynesian macroeconomists like Krugman have forgotten there are two approaches government can use to raise demand in a down economy.

Demand can be stimulated by increasing government spending using borrowed money. Demand can also be stimulated by reducing taxation. The latter is effectively the same as spending with borrowed money if all government services are maintained. It just doesn’t expand the scope and control of government inefficiency at the same time.

Both put more cash in the pockets of consumers and businesses. That raises spending which drives demand and pushes an economy back up to normalcy.

Paul Krugman has become so politically polarized in his economic thinking that it clouds his judgement. That is clearly demonstrated by his unnecessary references to Mitt Romney and Republicans.  He is discussing European debt for crying out loud, not U.S. Presidential candidates! Why even mention politics in that context unless you are trying to take a political stand?

Krugman’s economic thinking may be flawless, but we will never know that based on what he wrote in his op-ed.

Its as if Krugman has become so single-minded in his thinking that he’s detached himself from reason and got lost in his own rigid economic ideology.

It is critical in these uncertain times that influential authority figures be 100% credible.

Paul Krugman needs more factual rationality and less counter-intuitive opinion in his writing to be credible… be he a Nobel Laureate or not!

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Nov 12, 2011, in Debt, Debt crisis, Deficit, economics, Economy, EU, euro, news, Politics. Bookmark the permalink. 1 Comment.

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