Friday, May 7, 2010

Krugman: A Central Government Solves All Economic Problems. Yeah, Right

I am thankful for Paul Krugman, if for no other reason he has helped me keep my thinking diversified even as the Tonya Craft sham of a trial goes on and takes most of my attention. As the "Greek tragedy" unfolds and Krugman makes his commentaries, once again we see the difference between the Keynesian approaches and the Austrian ones.

Today (Friday, May 7), Krugman once again gives the standard Keynesian theme: A central government can save the day because it can print money. If you think I jest, read on:
The problem, as obvious in prospect as it is now, is that Europe lacks some of the key attributes of a successful currency area. Above all, it lacks a central government.
Now, how would a strong central government be able to rescue Greece from its current crisis? Krugman explains:
First, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. Second, the European Central Bank could engage in much more expansionary policy, among other things buying lots of government debt, and accepting — indeed welcoming — the resulting inflation (emphasis mine); this would make adjustment in Greece and other troubled euro-zone nations much easier. Or third, Berlin could become to Athens what Washington is to Sacramento — that is, fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable.
So, the idea would be for all of Europe to have more inflation via action from the central bank, and thus all of the Europeans could damage their economies simultaneously, creating new crises that Krugman conveniently fails to mention. (Inflation has a way of doing that.)

But, Krugman is not finished, as he also lays out another scenario: Greece leaves the Euro and goes back to the Drachma. In his own words:
What remains seems unthinkable: Greece leaving the euro. But when you’ve ruled out everything else, that’s what’s left.

If it happens, it will play something like Argentina in 2001, which had a supposedly permanent, unbreakable peg to the dollar. Ending that peg was considered unthinkable for the same reasons leaving the euro seems impossible: even suggesting the possibility would risk crippling bank runs. But the bank runs happened anyway, and the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door.

If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we’ve seen so far, that’s where this is heading.
Here is the problem that Krugman forgets: if Greece leaves the Euro, its currency will be considered "soft" on the world markets, like the currencies of Third World nations or of the old communist bloc. Combined with the big increase in inflation as Greece tries to print its way out of the crisis will be the fact that the Greeks will find the costs of imported goods skyrocketing, and they will be reduced quickly to poverty.

Krugman does not understand that deflation and recession would be the BEST things to happen to Greece, as while there might be default, the Greeks once again would be able to get their fiscal house in order. Yes, there would be a quick drop in their standard of living, but they not only would get past that quickly as the economy recovers, but they also would have a brighter future.

The Krugman "solution," however, only extends the problem into the healthier economies of Europe and with inflation, the "good" effects come first, and the "bad" effects are felt later. With deflation, it is the other way around. The Greeks will have troubles up front, but things will get better.

What Krugman does not understand is that the inflation "solution" only will distort the Greek economy even more without solving ANY of the underlying problems. Look, the Greeks are headed for very rough times no matter what they do. However, it would make sense for them at least to be able be doing something that would give them a decent economic future.

Instead, Krugman insists that printing money will solve all problems. I don't think so.


Unknown said...

I wonder if I can declare my house a country so I can print my own money....

William L. Anderson said...

Sure! You can print Sirs and distribute them, as they probably are more sound than the stuff coming from Washington!

Max said...

Economically I can only agree with your solution, but socially it will not happen. Here is why:

There would be chaos amongst Greeks who depended on the government for everything far too long. Also, to have a comeback AFTER the recession, one needs several requirements, two being:

a) A strong law and order state that handles property rights justly (FAIL)

b) A belief in free markets and entrepreneurship and thus an abstain of rioting (SMALLER FAIL).

The question is whether a smarter fast recession won't prove to break the Greeks neck and thus limit them to something akin to a continental Haiti, especially if they would receive "foreign aid" by the remaining EU states (which would be probable in any case).

Anonymous said...

Brilliant article, especially on the fact that the greek currency would cease to be a "currency" (especially for saving purposes) should Greece leaves the Euro. Exactly what Krugman ignores in his article, by the way I am amazed by the number of economists who said "the problem is that they are constrained by the Euro" if printing money would solve anything.

By the way, see the lamentable post of Greece versus Argentinaon 23/June/2011...