7.04.2013

The New York Review of Books: How the Case for Austerity Has Crumbled (Paul Krugman)

I've always found the study of macreconomics to be particularly fascinating; I believe the reality of human behavior can be measured in the trends/patterns of the world economies. Marcroecnomic models to my biology-oriented frame of thinking, are akin to the population growth curves in ecology, where the state of a species can be categorized into growing, stable, or declining states. But instead of measuring the "health" of our species, economic models measure the health of our societies, which I suppose can be considered indirect indicators of the survival potential of our species. Like all living things that have come before, our human societies will rise and fall only to leave behind a few fossilized artifacts to speak of our existence. How very existential, I know.

This Paul Krugman article in the NYRB talks about the perils of governmental austerity measures in reaction to the recession. Krugman is a beliveiver of Keynesian economics, which espouses that governmental intervention is necessary in depressions to stimulate the economy. Keynes was a Great Depression economist, who focused on depressions and getting out of them. I have heard a lot about the Keynes vs the Hayek schools of economics ever since the recession of 2008, and have both The General Theory of Employment, Interest and Money and The Road to Serfdom on my list of things to read. In the meantime I pick up a little of their philosophies from these current events economics articles.
Krugman basically states that the cause of the recent recession is a lack of demand, jobs, and movement of money in the economy. According to him, it's the role of government to produce more demand during these times by putting more money in circulation and creating jobs. Krugman maligns the current research spearheaded by the likes of Reinhart-Rogoff and Alesina-Ardagna, who have recently published influential economics papers decrying the dangers of excessive government spending. According to the Reinhart-Rogoff paper, debt that crosses the 90% of GDP is a trigger point for economic trouble (e.g. Greece, Spain, etc). These anti-Keynsian's believe that it is excessive government spending causing depression as people lose faith in their government's abilities to pay off debt and therefore the solution to a depressed economy is austerity measures that reign in big government budget deficits. The idea is that citizens regain confidence in the health of their government economies and will begin to spend money and create more jobs/demand naturally.
Krugman does not buy this and accuses these modern anti-Keynseian of incorrect math and perpetrating ineffective and dangerous government austerity measures. Krugman argues that demand will not  spontaneously pick up in the time of recession and austerity will only result in prolonged economic stagnation.  He says there is no such thing as this magic 90% threshold (that was due to bad math), and goes on to propose that the time for austerity measures is when the economy is overheated and booming, not when it's in recession.

krugman_figure1-060613

Krugman sounds convincing but I recognize he comes from a biased perspective. His writing is opinionated and a bit dramatic. But I enjoyed the opinion piece and will use it as starting point for more readings into macroeconomics.

Links for further reading:
1) The New York Review of Books: How the Case for Austerity Has Crumbled

2) IMF World Economic Outlook 2013

3)  The General Theory of Employment, Interest and Money (Keynes)

4) The Road to Serfdom (Hayek)

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