Posted on 05/30/2011 7:59:36 AM PDT by SeekAndFind
In bemoaning the pain of fiscal responsibility, says Newsweek’s Niall Ferguson, the Democrats show they still haven't learned the lessons of Europe.
To judge by media coverage, President Obama's whistle-stop European tour was largely recreational. In Dublin he reenacted the time-honored tradition of discovering his Irish roots. In London he took part in what felt like Royal Wedding: The Sequel.
Meanwhile, in Washington, business went on as usual. The government continued borrowing money despite having breached its legal debt ceiling. Senate Democrats voted down Paul Ryan's plan to reduce the cost of Medicare, despite having no credible plan of their own to stabilize the debt.
Yet Obama's travels could have been a timely opportunity to learn from Europe's fiscal mistakes. To American commentators, notably New York Times columnist Paul Krugman, the lesson is clear. "In Europe," he wrote last week, "the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer… [But] Europe's troubled debtor nations are… suffering further economic decline thanks to those austerity programs." Elsewhere, Krugman has repeatedly badmouthed the British government for trying to cut its deficit.
It's certainly true that the economies of Greece, Ireland, and Portugal—the three countries committed to austerity programs as conditions for European and International Monetary Fund bailouts—have shrunk over the past year. The unemployment rate is above 10 percent in all three. Meanwhile, the U.K. economy is growing sluggishly. But to infer from this that the United States can postpone serious attempts at fiscal stabilization would be completely wrong—and deeply dangerous. The point is that Greece & Co. are in trouble because of excessive borrowing. Between 1999 and 2010, the structural deficit of the Greek government rose from 2 percent of gross domestic product to nearly 18 percent. Ireland went from surplus to minus 11 percent. Portugal was little better. The result was a debt explosion. The net government debt of Greece, the worst offender, soared from 76 percent of GDP to 142 percent last year.
As it became clear that there was no automatic mechanism to transfer funds from the relatively frugal European core to the profligate periphery, bond investors started to fear defaults. They dumped the debt, driving up the yield on Greek 10-year bonds—and hence the interest rate on new borrowing—to 17 percent. That simply made matters worse, necessitating ever more desperate spending cuts and tax hikes to avoid national bankruptcy.
The British story is different. Starting in a very similar fiscal hole—the structural deficit was 8 percent of GDP in 2009 and the debt-GDP ratio had doubled in seven years—the new Tory-led government acted preemptively, announcing deep budget cuts before the financial markets freaked out. As a result, Britain's borrowing costs have actually come down.
Members of the Deficits Forever club are intellectually lazy when they assert that the U.K. economy is growing slowly because austerity doesn't work, implying that things would be better had the spending binge continued. Maybe. But maybe not. A responsible politician wouldn't take the gamble because the costs of being wrong are too high. Just ask the Greeks.
The real lessons for the United States are clear. Those who run up debt in good times can borrow only so much more when a recession strikes. And heavily indebted governments postpone fiscal stabilization at their peril. If you wait to reform until the bond market calls time, you are—to use a technical term from economics—screwed. The best option is, of course, to be Switzerland, a country strangely ignored by Krugman. The Swiss have run a prudent fiscal policy throughout the economic crisis. They have had a structural surplus in each of the past five years. Their net debt is actually lower today than it was in 2005. And guess what? In 2009 their economy suffered the smallest contraction in Europe, with unemployment today below 4 percent. As for sound money, the Swiss franc is up 95 percent against the dollar since 2000.
Too bad American presidents never visit Switzerland. But I guess they can't afford to.
-- Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. He is also a senior research fellow at Jesus College, Oxford University, and a senior fellow at the Hoover Institution, Stanford University. His latest book, The Ascent of Money: A Financial History of the World, was published in November.
So....Paul Krugman, Nobel Prize winner in economics, bemoans the fact that Greece, Ireland and Portugal, with their turn to fiscal conservatism, has made their plight WORSE?
I can’t stand this guy. I feel pretty sure that he’s paid off for spouting off his absurd opinions. for sure he thinks we were born at night, LAST NIGHT!
When my husband was hospitalized recently for a serious brain infection, the paychecks stopped. Oh he eventually got Disability from SS but there was a period of time when I had to sit down and take a close look at our finances.
Up until then life was good, money came in, bills were paid. Well sure we charged up this then when at the max we charged it over here and hey, the payments were only about $50 a month, what could go wrong?
My serious look had me realizing that we were paying, in some cases, 30% interest and those mere fifty buck a month credit card bills added up to almost a thousand a month. I’m certainly not proud of this but hey, things got away from me.
It took a year, a bit more. But we cut up all the credit cards, we called them up and asked for a break...a brain infection....in most cases we got it. We struggled and paid and it was tough.
Per the wonderful Economic Nobel prize winner Krugman, our tough times were for nought and only made our struggles worse.
Sometimes you gotta sacrifice NOW for a better future.
Although hey, I get it...nobody ever tole the libs this.
Way I figger, I deserve that Nobel prize more than stupid Krugman.
RE: Krugman is an idiot
That’s it, I should tell my idiotic liberal nephew that he still has a chance at winning the Nobel Prize :)
There is a growing anger against the ruling class by the country class. The solutions proposed and dictated against the will of the people have not worked as promised except to enrich the ruling class.
The idea that now we can try austerity is ludicrous and will result in revolution. The people are angry, and the ruling class does not get it yet.
schu
It is an ample demonstration of why America has declined: people like Krugman have influence in the government when his demonstrated IQ qualifies him to sweep the ground floor of the Treasury - with hands-on help, of course.
“Austerity” is a word that the Repubs need to get a hold of before the Left re-frames it.
I think Dims have learned the lesson.
They haven't addressed the budget, medicare, SS, because they can't simply because it would expose them as frauds so they do nothing hoping against hope they can figure a way way to lay the blame on the GOP.
It's all about timing, when, not if, it all comes crashing down, who will be in the best position to pick up the pieces of a devastated US economy
By doing nothing the dims think they can project blame on the GOP and continue in power
Krugamn was a member of Journo-list and that alone should ruin his credibility forever. Why anybody would take seriously anything that any of the tools who were members of that entity writes is beyond me. He obviously has an agenda and is pushing it.
As for his Nobel prize, wasn't for some abstract international trade theory and not on governmental policy?
In the austerity scenario we face both groups will be angry as the answer is not either/or, both will be unhappy with the outcome. They will be angry for different reasons of course, but no one wins moving forward ... except the statists and the rich who have already received their largess via favoritism from the government and financial power brokers.
sschu
It would be great if this were true, but we are past the point of no return. First, nothing will be done on the budget for at least 2 years as the Demos and Bam have decided to politicize the process and the Repubs have accommodated this effort. How stupid can Boehner be to lead with a proposal without the Demos being part of the discussion? Just paint a big political target on your back, kill Grandma and sick people. Who is setting strategy anyway?
We have passed the 90% debt/GDP ratio threshold and there is no end in sight. Either deflationary depression or hyper inflationary currency collapse is all that is left.
There is little the politicians can do right now, the die has been cast.
schu
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