The Nobel memorial economy prize laureate Paul Krugman yesterday wrote that one should not apply austerity measures in an economic crisis - a theme he often comes back to.
The problem with the whole article, as with many of his articles, is that he does not set any criteria. He claims that the problems in Portugal, Britain and Ireland have become worse because of slashed spending. That may be true or not. However, even if it were true, there clearly is a limit as to what a country can afford. If there is no money, there is no money. You can go out and borrow to some extent, but not infinite amounts. There must mathematically be a limit.
Personally, I could easily take a loan to buy a Toyota Yaris for €10 000. However, no bank in their right mind would lend me €200 000 to buy a Bentley. I would not be in my right mind myself if I applied for such a loan, even if I needed that particular car for some good reason. The economic potential is not there. Somewhere there is a limit.
If I had to go through some expensive medical treatment, I might need €10 000 000. Does that mean that I would pay for it? No. The money is not there. I might need it, but I could not afford it. Would that be a tragic situation? Yes, but there would be no way around it.
Likewise for a country's economy. Increased spending or quantitative easing may be the right measure in some situations: When the conditions allow it. If the conditions are not there, increased national bond yields and unemployment will unfortunately follow, but there is no way around it.
Increased spending cannot always be good for all economic situations. It may have been the way Britain should have gone (something I'm not convinced of), but that would not mean that it necessarily has to be the way the US should go. They are two different countries. The conditions are different.
If Krugman can provide data that shows that the US currently is in the kind of situation where increased spending makes sense, by all means, that is the way to go.
However, the argument that increased spending always makes sense for all countries in all situations does not work.
The problem with the whole article, as with many of his articles, is that he does not set any criteria. He claims that the problems in Portugal, Britain and Ireland have become worse because of slashed spending. That may be true or not. However, even if it were true, there clearly is a limit as to what a country can afford. If there is no money, there is no money. You can go out and borrow to some extent, but not infinite amounts. There must mathematically be a limit.
Personally, I could easily take a loan to buy a Toyota Yaris for €10 000. However, no bank in their right mind would lend me €200 000 to buy a Bentley. I would not be in my right mind myself if I applied for such a loan, even if I needed that particular car for some good reason. The economic potential is not there. Somewhere there is a limit.
If I had to go through some expensive medical treatment, I might need €10 000 000. Does that mean that I would pay for it? No. The money is not there. I might need it, but I could not afford it. Would that be a tragic situation? Yes, but there would be no way around it.
Likewise for a country's economy. Increased spending or quantitative easing may be the right measure in some situations: When the conditions allow it. If the conditions are not there, increased national bond yields and unemployment will unfortunately follow, but there is no way around it.
Increased spending cannot always be good for all economic situations. It may have been the way Britain should have gone (something I'm not convinced of), but that would not mean that it necessarily has to be the way the US should go. They are two different countries. The conditions are different.
If Krugman can provide data that shows that the US currently is in the kind of situation where increased spending makes sense, by all means, that is the way to go.
However, the argument that increased spending always makes sense for all countries in all situations does not work.
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