Paul Krugman: The austerity delusion

What about Japan? They tried to buy economic growth (dubbed Abenomics) and failed horribly. The economy is worse and government debt is higher than ever.

Models that can't explain some weird edge cases are ok. But what happened in Japan is the exact opposite of what Mr. Krugman tries to convince people.

Krugman has written a lot about Japan, and Abenomics. According to Krugman's own analysis, Abenomics would not be very effectual and warned that particular Abenomics policies (like the tax increases) would indeed worsen the economy. It's a little disingenuous to say the economy is worse: growth did improve (until the VAT increase Krugman warned would be disastrous) and unemployment did fall, and Krugman wasn't worried about the debt in the first place since the Japanese can still borrow at very low rates.

Abenomics does not correspond almost at all to Krugman's prescriptions, it was simply expected to be slightly less bad than what was happening before.

Looks like BoE Governor Carney is anti-austerity. I wonder how his meetings with Mr. Cameron go.

http://www.theguardian.com/business/2015/jan/28/bank-england...

If all you care about is the short-term, then forget about austerity. Juice things up a bit. Throw some borrowed money at it. Alleviate some economic misery. But long-term, living within your means leads to greater stability, a market where prices reflect reality, and people that save are rewarded. This is a far greater payoff in exchange for some potential short-term pain.

The worst part is that many governments claiming “austerity” are just playing accounting tricks and not really moving towards solvency. The solution for having spent too much and distoring the economy is not to continue to do the same.

We’ll never know who is right, though. Most of the world has been following the recommendations of this “economist” for decades. Maybe only indirectly because I’m not sure how many people pay attention to him. Spending massively is popular with the public because they get all the benefits, but will be 6 feet under when the bill comes due.

Just because it’s a government instead of a household or a business does not making borrowing against your future when you have no capability to pay it back a good idea. This guy is the same type of person that thinks that companies carrying a lot of debt is a good idea. The sign of a healthy business. Bunk.

The proper time for austerity is when things are good. When things are bad, juice it up, especially if you can borrow at rates that are negative when inflation adjusted.

The problem with austerity now to make the long term better is that it's not a zero sum game. Austerity lowers GDP growth, which can offset any move toward solvency. You spend less and surprise, you also take in less. Eventually you recover, but poorer than if you had juiced things a bit and no less in debt.