“Austerity” versus “stimulunacy”—with a Krugmanite twist!

The whole economic world is now debating “austerity” versus “stimulunacy,” with every variant of alleged economist on either side, with every variant of what those two words might mean—including Paul Krugman, who is famously still telling the world that the US (on its knees after a world-historical scale  borrow-and-spend binge) has to endure its government borrowing and spending on a Biblical scale  if it’s ever to get back on its feet.

This is, of course, like the prescription your Dr Feelgood likes to give you: more of the same drug that got you hooked in first place, and in ever vaster quantities.

Krugman at least has the virtue of consistency on his side.  He was offering the same batshit crazy prescription when the Asian Financial Crisis hit in 1997, famously insisting in his book Return of Depression Economics that unless Asian governments whacked up their deficits to similarly eye-watering heights, the whole world was in for a swift come-down.

Famously, of course, he was wrong, for reasons pointed out by economist Kenneth Rogoff (who was by then chief economist to the IMF) in a letter to Krugman ally, George Siglitz—reasons which have now become as topical as they were then, as you’ll see.  Said Rogoff:

Governments typically come to the IMF when they are having trouble finding buyers for their debt, and when the value of their money is falling.  The Stiglitzian[/Krugmanite] prescription is to raise  … fiscal deficits, that is, to issue more debt and to print more money.

And so it is!

You seem to believe [Rogoff continues, warming now to his theme]  that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Stiglitz and Krugman were both wrong.  Fortunately, nobody outside Japan listened to them then. Rather than splurge on a new Keynesian investment line of deficits and stimulunacy, as Stiglitz and Krugman insisted, predicting disaster all round if they didn’t, Asian governments (outside Japan) instead balanced their books and let their economies re-tool, reallocate and recover—and rather than relapse into depression, they instead returned swiftly to rapid growth.  Unlike Japan of course, which followed the prescription of Drs Stiglitz and Krugman, and is still even now in the Recovery Ward.

Just another world-historical lesson that you might consider remembering today, as you listen to the same debate again. Same debate, even one of the same con-men, just slightly different protagonists.

PS: On a somewhat related note, since he’s taken to criticising the “Hayekian” solutions  currently characterised under the label of “austerity,” it’s now apparent that the alleged economist Paul Krugman doesn’t even know his Hayek from his hat-stand.  Just one of the inconvenient truths pointed out to him in the replies to his latest column by (among others) Jonathan M. F. Catalan, Richard Ebeling, Bob Roddis, and Richard Ebeling again.