Paul Krugman:Austerity Arithmetic

[cal04]

The betting markets now believe that Greece will vote “no”, but nobody really knows even now. So let me take some time to do a calculation that I should have done a while ago. Here’s the question: Even if you ignore everything else, can austerity policies really improve the debt position of a country in Greece’s situation? If so, how long will that take?

Suppose, to be concrete, that we talk about permanently raising the primary surplus by one percent of GDP. As I’ve written before, and as Simon Wren-Lewis notes, given the lack of an independent monetary policy achieving a primary surplus requires a lot more than one-for-one austerity. In fact, a good guess is that you’d have to slash spending by 2 percent of GDP, because austerity shrinks the economy and reduces tax receipts. This in turn means that you’d shrink the economy by around 3 percent. So, a 3 percent hit to GDP to raise the primary surplus by 1.

But a smaller economy means that the debt/GDP ratio goes up initially. In fact, given Greece’s starting point, with debt at 170 percent of GDP, the adverse effects of austerity mean that trying to raise the primary surplus by 1 point quickly causes the debt-GDP ratio to rise by 5 points (.03*170). So this might suggest that it would take 5 years of austerity just to get the debt ratio back to where it would have been in the absence of austerity.

(snip)
And just to be clear, I’m basically doing textbook macroeconomics here, nothing exotic. It’s the austerians who are inventing new economic doctrines on the fly to justify their policies, which appear to imply not temporary sacrifice but permanent failure.

more at link
http://krugman.blogs.nytimes.com/2015/07/05/austerity-arithmetic/?smid=tw-NytimesKrugman&seid=auto&_r=0

[djean111]

1. I now believe that the only point of austerity is the joy that the banks get from inflicting it.

It is like bullies going through poor kids' pockets and taking all their lunch money, after the kids' parents have lost their jobs.

[phantom power]

3. seems like it, since it's not even good economics for the debtors.

[starroute]

5. It's about power, not money

The objective at the moment is to break Syriza and thereby deal a blow to Podemos and other radical-left parties in Southern Europe. Beyond that, it's to spread the neoliberal message of "Resistance is futile, prepare to be assimilated."

It's pure terrorism, just like Finance Minister Varoufakis says. And whatever sadistic pleasure it affords the perpetrators is purely a side benefit.

[azmom]

8. +1

[magical thyme]

10. It started years ago, before Syriza. in fact, it led to the rise of Syriza

It was intended to break Greece totally, and permanently, in order to privatize everything and enable the 1% to purchase Greek assets at complete bankruptcy prices.

The 1%ers weren't satisfied with cheap Greek Med vacations. They wanted free Greek vacations. Even to be paid to vacation in Greece. To re-name the Parthenon, "Deutschbank Parthenon." To run the Greeks out of Greece, except enough to serve as servants.

This is what I have said all along. This is what I have believed all along.

[DirkGently]

25. Yes. The simple formula of money = power at work.

This is why laughing off all the conspiracy theories is dangerous business. Giant financial interests absolutely do wish to control the world, and here they are doing it.

"Cut the pensions for the poor and don't raise taxes on the rich, or we'll call your note due."

Real conspiracies are simple and boring. The wealthy wield money as a weapon against the poor. The end.

[Rod Beauvex]

26. Power.

That is a good point, Star, and it is one people seem to constantly miss.

It isn't only about money. It is about power, and control.

[Wellstone ruled]

2. Pretty much the same garbage as Trickle-Down.

Bust your Ass so the Boss can buy that extra house. Same as the Law of Diminished Returns. Appears we here in the good ol USA we are seeing a familiar refrain,look at what is happening in GOP controlled States. Open your eyes and pay attention folks,votes do count.

[Adrahil]

4. Krugman, as usual is right. Austerity does not work. nt

[madville]

6. And if no one will lend them more money

Then what?

[closeupready]

9. Pointless question.

[jeff47]

11. You say that as if it is not already the case.

What happens is up to the Greek government. One option is to re-introduce the Drachma and inflate their way into competitiveness. As Iceland successfully did with inflation.

Another option is to stay on the Euro. Another option is to introduce a temporary scrip for pensions. Another option is to go back to the Europeans and point out if Greece leaves, their other whipping boys might get "uppity" too, so it's time to take a haircut.

[former9thward]

15. Iceland never defaulted on its debt.

Apples and oranges.

[jeff47]

17. Actually, they did.

In that Iceland's banks defaulted on debt owed to other countries, and Iceland refused to nationalize the bad private debts as those creditor nations demanded.

[former9thward]

18. Greece is defaulting on sovereign debt.

Iceland never did that.

Greece, Ireland Can’t Copy Icelandic Default, Sigfusson Says

June 15 (Bloomberg) -- Iceland is warning Greece and Ireland not to copy its recovery model even though the Atlantic island managed a return to international debt markets less than three years after letting its banks default on $85 billion.
“People should be careful when it comes to drawing comparisons between Iceland on the one hand, and Greece, Portugal, Spain and Ireland on the other,” Finance Minister Steingrimur J. Sigfusson said in an interview in Reykjavik. “Iceland didn’t have the ability to save the banks. Trying to rewrite the events that led to that eventuality as some sort of an export product is irresponsible.”

http://www.bloomberg.com/news/articles/2011-06-15/greece-ireland-can-t-default-like-iceland

[jeff47]

19. It became sovereign debt when the Greeks nationalized bad private debt.

And they did that because the EU/IMF demanded it as a condition for aid.

[former9thward]

22. They made that choice.

Now they have to live with it.

[jeff47]

24. No, actually they don't have to live with it.

Just like a person, they have options to not "live with it". Persons declare bankruptcy. Countries with their own currency (and debt in that currency) devalue that currency.

[magical thyme]

12. they already have a business deal with Russia worth hundreds of millions/year

to run the gas pipeline through Greece (for an alternate route to western Europe via Italy). Just signed in the last few weeks I believe.

They also have deals in the works with China, and China has hinted it may help them directly as well.
http://geopolitics.co/2015/07/02/china-may-aid-greece-directly/

[madville]

16. Hundreds of millions are worthless to them

They'll run through that in less than a month. They need hundreds of billions at this point. They owe almost 200 billion just to Germany, France and Italy alone.

[NCjack]

7. Austerity will transfer a huge amount of property from poor to rich.

[abelenkpe]

13. +1000 nt

[daleanime]

14. K&R.....

[ChiciB1]

20. YOWZA, YOWZA, YOWZA! Got My Attention And

GO Paul! Keep the information up front and in their face!

[Uncle Joe]

21. Kicked and recommended.

Thanks for the thread, cal.

[roamer65]

23. Best route is for Greece to leave the Euro "straightjacket"...

and to devalue the new drachma. That will allow them to become competitive again. Same goes for Portugal, Ireland, Spain. And Italy.