Note to Krugman: Greece Proves Keynesian Economics Wrong
Times columnist Paul Krugman’s continuous railing against austerity reached a crescendo with Greece’s default. In his What Greece Means, Krugman vents his outrage:
“What Greek experience actually shows is that while running deficits in good times can get you in trouble… trying to eliminate deficits once you’re already in trouble is a recipe for depression…Greece is the worst case, with unemployment soaring to 20 percent even as public services, including health care, collapse.”
Bankrupt economies, like Greece, need stimulus, not austerity, Krugman declares indignantly. The “austerity-induced depressions” around the European periphery are proof that Keynes was right. Germany’s Angela Merkel, her IMF-austerity allies, and world-wide lenders do not understand that we need a massive stimulus to get Greece out of this mess. They need to step up to the plate if they are good citizens of Europe (or the world).
Krugman does not fess up that Greece’s Keynesian policy of endless borrowing to fund wasteful government spending and feed massive welfare programs is exactly what got Greece in the trouble it is now in. The Greeks cannot pay their bloated public payrolls, out-of-kilter wages, and generous pensions and early retirements unless fools lend them money that will not be repaid. Even the Greeks themselves are not falling for that trick. They are too busy transferring their assets abroad. Merkel and her stingy Germans make for good scapegoats, but it’s not only them. Lenders throughout the world have shut down the lending spigot.
Liberals are gearing up to use Krugman’s Greek fable of “Keynes has won” to justify further trillions of U. S. debt and growing government to ever greater heights, as Times columnist Nicholas Kristof reveals in his In Athens, Austerity’s Ugliness:
“Europe declared war on Keynes, and Keynes is winning…If you want to know how well (Republican budget cutting) works, come visit Europe — especially Greece. Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious.”
Nothing like a good example to dial in the conversation.
Dr. Ron Paul discusses Austrian vs. Keynesian economics on Morning Joe 05/15/2009
The Political Failure of Keynesian Economics
Last August I asked a question: "What if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields."
When people like Paul Krugman say that almost $900 billion in stimulus didn't work because it wasn't big enough, you have to wonder if an adequate Keynesian stimulus is even possible. Could any government anywhere borrow 15% of GDP or more to spend on temporary measures with the blessing of their citizens? For that matter, would the markets lend the money without ratcheting up interest rates? Can an extra 15% of GDP be spent without showing sharply diminishing returns--meaning that you'd need even more spending to generate the effects you want?
Today Alex Tabarrok looks at the history and concludes that even if Keynesian economics works in theory, Keynesian politics fails in practice--at least in a Democracy:
Conventional liberal wisdom: eliminate the democracy.