Dr. Ulrich Salzer contra Professor Paul Krugman
Monday, February 11, 2013 12:08 AM
Please find below a letter written by a friend of mine in Germany, Ulli Salzer of Munich, to Paul Krugman of the New York Times. Ulli is a German banker and lawyer. His letter speaks for itself. I think we still face the same choice: Salzer or Krugman? Or something in between? Maybe we no longer have a real choice. The situation may be completely out of control.... First, Ulli’s letter, then Krugman’s New York Times editorial.
Professor Paul Krugman
The New York Times, 620 Eighth Avenue
New York NY 10018 USA
10. February 2013
Austerity Programs vs. more Deficit Spending
Dear Professor Krugman,
I just came across an article you have published in the New York Times on Feb. 1st, 2013 entitled Looking for Mr. Goodpain in which you heavily criticize the efforts of major European Governments in reducing their budget deficits instead of (as you demand) dealing “with the real problem – namely unacceptably high unemployment”.
Your recipe in dealing with the financial crisis of already over indebted economies is simply to continue with more deficit spending programs, i.e. more budget deficits instead of austerity – in which you are in line with the demands of certain nationalistic and socialistic parties in Europe.
In making reference to Maynard Keynes they overlook that deficit spending may work on short basis to correct a cyclical downswing of the economy – but never has and never will work to correct structural economic deficiencies.
We have to face the fact that throughout our western hemisphere Governments have piled up public debt that is no longer manageable and that can never be properly serviced from tax-income with the consequence that it will finally burdened over to our grandchildren!
Our macroeconomic model has been too long and with too devastating effects based on continuous deficit spending under the excuse to overcome unemployment and social imbalances with the effect that the borrowing capacity of the formerly “leading” industrial nations has reached or rather overreached its limits of sound credit analysis.
Especially the US has become too vulnerable against political blackmailing from its US $ 16 trillion creditors to play its role as the worlds political leader any longer!
Deficit spending is a sweet drug on which you find yourself addicted very soon – especially when debt service can no longer be assured from regular tax income but can only be assured through additional loans!
If anybody is on drugs – and all our Governments have been for years and are still on the sweet drug of ever rising public debt, even the ones you openly criticize because of their “austerity policy”--his or hers only medical chance is a strict regimen in a detox institution, how painful this may be!
And this is exactly what our countries need most – a painful adaptation to their economic realities or – as a final alternative -- bankruptcy! Governments have to stop burdening the next generations with more unserviceable debt in order to keep up with their false pretense of spending money they don’t have. Isn’t it highly unsocial to accumulate more debt in order to be celebrated as benefactor today and leave the debt-service to your successors tomorrow?!
Your recipe however – if I understand your article correctly – is just to continue and feed the addict regularly with new drugs, rather than to confront him with a painful treatment in an anti-addiction clinic. Your article is therefore not very helpful because in every highly indebted society there are natural opponents to a stringent government fiscal policy – how necessary such policy may be – especially from those that have most profited from a generous debt policy and high budget deficits to fund social programs. Your article therefore may discourage every medical helper in his attempt to help the patient to overcome his drug addiction:
Dr. Ulrich Salzer,
Looking for Mister Goodpain
[by Paul Krugman, The New York Times, February 1st, 2013]
Three years ago, a terrible thing happened to economic policy, both here and in Europe. Although the worst of the financial crisis was over, economies on both sides of the Atlantic remained deeply depressed, with very high unemployment. Yet the Western world’s policy elite somehow decided en masse that unemployment was no longer a crucial concern, and that reducing budget deficits should be the overriding priority.
In recent columns, I’ve argued that worries about the deficit are, in fact, greatly exaggerated — and have documented the increasingly desperate efforts of the deficit scolds to keep fear alive. Today, however, I’d like to talk about a different but related kind of desperation: the frantic effort to find some example, somewhere, of austerity policies that succeeded. For the advocates of fiscal austerity — the austerians — made promises as well as threats: austerity, they claimed, would both avert crisis and lead to prosperity.
And let nobody accuse the austerians of lacking a sense of romance; in fact, they’ve spent years looking for Mr. Goodpain.
The search began with a passionate fling between the austerians and the Republic of Ireland, which turned to harsh spending cuts soon after its real estate bubble burst, and which for a while was held up as the ultimate exemplar of economic virtue. Ireland, said Jean-Claude Trichet of the European Central Bank, was the role model for all of Europe’s debtor nations. American conservatives went even further. For example, Alan Reynolds, a senior fellow at the Cato Institute, declared that Ireland’s policies showed the way forward for the United States, too.
Mr. Trichet’s encomium was delivered in March 2010; at the time Ireland’s unemployment rate was 13.3 percent. Since then, every uptick in the Irish economy has been hailed as proof that the nation is recovering — but as of last month the unemployment rate was 14.6 percent, only slightly down from the peak it reached early last year.
After Ireland came Britain, where the Tory-led government — to the sound of hosannas from many pundits — turned to austerity in mid-2010, influenced in part by its belief that Irish policies were a smashing success. Unlike Ireland, Britain had no particular need to adopt austerity: like every other advanced country that issues debt in its own currency, it was and still is able to borrow at historically low interest rates. Nonetheless, the government of Prime Minister David Cameron insisted both that a harsh fiscal squeeze was necessary to appease creditors and that it would actually boost the economy by inspiring confidence.
What actually happened was an economic stall. Before the turn to austerity, Britain was recovering more or less in tandem with the United States. Since then, the U.S. economy has continued to grow, although more slowly than we’d like — but Britain’s economy has been dead in the water.
At this point, you might have expected austerity advocates to consider the possibility that there was something wrong with their analysis and policy prescriptions. But no. They went looking for new heroes and found them in the small Baltic nations, Latvia in particular, a nation that looms amazingly large in the austerian imagination.
At one level this is kind of funny: austerity policies have been applied all across Europe, yet the best example of success the austerians can come up with is a nation with fewer inhabitants than, say, Brooklyn. Still, the International Monetary Fund recently issued two new reports on the Latvian economy, and they really help put this story into perspective.
To be fair to the Latvians, they do have something to be proud of. After experiencing a Great-Depression-level slump, their economy has experienced two years of solid growth and falling unemployment. Despite that growth, however, they have only regained part of the lost ground in terms of either output or employment — and the unemployment rate is still 14 percent. If this is the austerians’ idea of an economic miracle, they truly are the children of a lesser god.
Oh, and if we’re going to invoke the experience of small nations as evidence about what economic policies work, let’s not forget the true economic miracle that is Iceland — a nation that was at ground zero of the financial crisis, but which, thanks to its embrace of unorthodox policies, has almost fully recovered.
So what do we learn from the rather pathetic search for austerity success stories? We learn that the doctrine that has dominated elite economic discourse for the past three years is wrong on all fronts. Not only have we been ruled by fear of nonexistent threats, we’ve been promised rewards that haven’t arrived and never will. It’s time to put the deficit obsession aside and get back to dealing with the real problem — namely, unacceptably high unemployment.