Will "Austerity" Doom Us? Or Is It a Plot By Bond Buysers?

Paul Krugman is a guy on a mission, and when he writes all of his columns and blogs on a single theme -- "Austerity" is Bad, Really Bad -- then one can tell he is serious about his message. His column today falls into that category (again), but now he also presents the problem as being caused both by ignorance (not agreeing with Krugman is being ignorant) and A Sinister Plot By Bond Buyers To Destroy The World.

Riding in on his steed, Krugman declares:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence (see Greece, debt of). But what the advocates of austerity claim is that (a) the bond vigilantes are about to attack America, and (b) spending anything more on stimulus will set them off.

But the 2008 Nobel Laureate has declared that the USA can and should continue on its spree of borrowing, printing money, and spending. (Thus, we can pretend we prosperous and rich even when we are broke, since printing money creates wealth, according to this Keynesian acolyte.)

Krugman's poster child for "austerity" is Ireland, which according to him is in the Very Throes of Permanent Destruction:

And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk.

However, according to Financial Times, Ireland is not doing as badly as Krugman claims, and seems to be moving in the right direction:

Ireland climbed out of recession on Wednesday with the economy returning to growth in the first quarter, after suffering one of the deepest downturns of any advanced industrialised economy.

Ireland’s return to growth, in spite of having undertaken a huge fiscal retrenchment over the past two years which prolonged the downturn, will provide encouragement to other European economies facing up to tackling rising public deficits.

Furthermore, FT notes Krugman's recent criticisms of Ireland's policies:

Paul Krugman, the Nobel-laureate economist, argued last week that Ireland had seen little reward for its brave fiscal measures. “Virtuous, suffering Ireland is gaining nothing,” he wrote in the New York Times. He was referring to the reaction in the bond markets, where Ireland is still paying 3 per cent more than Germany to finance its budget. But Irish ministers argue they had little choice but to tackle the deficit.

“Had we not done so, the deficit would have ballooned towards 20 per cent of GDP – a level at which the very financial survival of this country would have been at risk,” Mr Lenihan said at the time of the December budget.

Ireland has slashed public sector salaries by about 15 per cent. Welfare has been cut, including 10 per cent off child benefit. New income and health levies have also been imposed.

The return to growth reflects a buoyant performance by the export sector, particularly the foreign-owned multinationals, who have benefited from the euro’s decline and from Ireland’s falling cost base. Ireland sells close to 60 per cent of its exports outside the eurozone – to the UK, US and other economies.

Now, FT is not claiming that Happy Days Are Here Again on the Emerald Isle, but it is clear that after chasing the same housing bubble as much of the rest of the world, Ireland is putting its house in order, unlike the USA. Krugman's entire analysis depends upon the notion that governments should spend and spend until the economies "recover," but with government continuing to prop up malinvestments and discouraging private investment in healthy sectors due to what economist Robert Higgs calls "regime uncertainty," there is not going to be a recovery in the private sector, period.

In Keynesian analysis, the "end game" is the magical recovery of the private sector. Yet, FDR's New Deal (which Krugman generally praises) clearly did not bring recovery, and it created a huge regime uncertainty. However, given the Obama administration's attacks upon productive people and its attempts to force high-cost, low-output things like "green jobs" upon us, not to mention Obama's own anti-entrepreneurial rhetoric, government spending is likely to be the only game in town.

It won't bring recovery, but it does permit people like Krugman to claim that the state really is our savior when, in reality, it is anything but.

(Hat tip to Chris Westley for the FT article)