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Posts Tagged ‘Krugman’

Austerity and Ideology

January 8, 2013 6 comments

Wolfgang Munchau has another interesting editorial on austerity, in yesterday’s Financial Times. He argues that the US may become the next paying member of the austerity club, thus making the perspective of another lost decade certain.

Munchau’s article could be the n-th plea against austerity, as one can by now read everywhere (except in Berlin or in Brussels; but this is another story). What caught my attention are two paragraphs in particular.

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Be Smart, Borrow More!

June 4, 2012 3 comments

Larry Summers has a very interesting piece on yesterday’s Financial Times.

He argues that a few countries (the US, Germany, Japan, the UK; I would also add France) enjoy extremely low borrowing rates, both short and long run. In particular, real rates (nominal rate minus inflation) are negative or zero for maturities up to 5 years, and extremely low for longer ones.  Summers’ conclusions are then straightforward:

  • Focusing on further quantitative easing is not particularly useful;  given the already very low rates, further reductions are unlikely to trigger private spending (it has a name: liquidity trap. And Paul Krugman has been insisting a lot on this, for example here)
  • More importantly, government should borrow now, like crazy, taking advantage of the favorable conditions to reinforce their long term fiscal sustainability. This is what any reasonable CEO would do, and there is no reason why governments should act differently.

Summers makes a point that is almost obvious: Any project that has positive expected return would improve the country’s fiscal position, if financed with debt at negative real rates: This is the time for example to borrow to buy government buildings that are currently leased. Or to accelerate the rate of  replacement of aging capital; or again, to engage in long term infrastructure building/renovation. Makes sense, right? It makes so much sense, that chances are that it will not be done…

I would like to add two considerations. The first is to stress that to get private demand started, it is important that growth perspectives are stronger. Firms today do not invest, not because of borrowing costs, but because even at very low interest rates, expected demand is so low that investment is not profitable. The second is that, for Europe, increased borrowing in Germany, France and the UK would be crucial. Countries enjoying low rates could not only significantly improve their long term prospects, as Summers argues. They could also sustain demand in countries that are consolidating, thus favoring the rebalancing I have repeatedly argued for.

European Suicide

April 16, 2012 1 comment

Not that he needs it, but I feel I must advertise this New York Times editorial by Paul Krugman, on the looming European catastrophe. As usual, it is masterly written. I just want to add one remark: The economic suicide of Europe happens because of ideological blindness. We are trapped in a doctrinal approach to economics and economic policy. There is nothing you can do against fundamentalism.

Should the title of this blog change from Gloomy to Desperate?

Go West and Take the Best

March 7, 2012 2 comments

Paul Krugman has an interesting piece on federal and local expenditure in the United States, where he shows that the consolidated fiscal stance has been considerably more restrictive with Obama than during the Reagan era. This is not what retained my attention, nevertheless. Krugman does not mention that most of the US states (the exception being Vermont) have some form of balanced budget amendment. Krugman himself had warned a while ago that this made the task of the federal government in fighting the recession particularly hard. But once again, this is not the point I want to make.

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Aliens to the Rescue

January 10, 2012 6 comments

An excellent post by Paul Krugman on Germany’s flawed view of the Eurozone. He points to the obvious: unless we trade with Mars, it is plain impossible that all countries base their growth on exports. If the Germans want to sell their Mercedes to Italians, they need to be willing to buy our pasta (I feel so original…).

Germany’s success rests on other countries’ excess consumption, and on converging interest rates, that for a decade led to capital flows into the EMU periphery to finance consumption of German goods. In a sentence, and simplifying: without Greece, Germany would not be in place to lecture other countries today.

The least Germany could do is to give back something through an expansion of domestic demand that could make the adjustment in the periphery less painful. I had myself made this point a while ago. I also remember an old editorial by Martin Wolf that ended saying something like “If Germany wants the rest of Europe to be more German, it needs to be less German itself”. I Could not agree more…

Instead, German leaders and economists  spend their time perpetuating the false narrative of expansionary fiscal contractions, so well debunked by Krugman and De Long among others. The obvious does not seem so obvious to them…

I come back to my first post.  Solidarity and symmetry seem bad words in today’s Europe, but to me are the keys to the exit from the EMU crisis (and if you read Jean Monnet, the founding fathers had the same ideas…)

Paul Krugman on the End of the Euro

November 9, 2011 Leave a comment

There is no need to write a post on the latest developments in Italy and in the eurozone. Paul Krugman says better than I could, how close we are to Armageddon.
There is only one very minor point of dissent, that for once makes me less pessimist than he is. I give more importance to the Italian internal factors than he does. If a solution is found to the current political turmoil, there may be a truce in the speculative attacks, and the spreads may go down to more manageable levels.
It remains true that without a rapid u-turn of the ECB, speculation will not be defused.