Paul Krugman: Austerity Is 'Killing the World Economy'


In Friday’s column at the New York Times, Paul Krugman outlined exactly what was wrong with the manner in which most governments have responded to the world economic crisis. In particular, he discussed how Japan’s half-measures have helped create “debt dynamics” based on a notion of respectability that’s an “economy-killer.”

The problem in Japan, he argued, is deflation, the solution to which is simply to print more money. The Japanese central bank has been doing so, but because of low interest rates, “there’s no real penalty for sitting on cash,” so that’s what individuals and institutions are doing. 

What they need to be doing to is “us[ing] it to buy stuff,” investing in “slightly risky assets in the hope of…pushing up asset prices and persuading both investors and consumers that inflation is coming, and so they’d better put idle cash to work.” Instead, politicians are imposing austerity measures that hamstring the efforts of central banks to fight inflation. Why?

According to Krugman:

Part of the answer is that demands for austerity serve a political agenda, with panic over the alleged risks of deficits providing an excuse for cuts in social spending. But the biggest reason it’s so hard to fight deflation, I contend, is the curse of conventionality.

After all, printing money to pay for stuff sounds irresponsible, because in normal times it is. And no matter how many times some of us try to explain that these are not normal times, that in a depressed, deflationary economy conventional fiscal prudence is dangerous folly, very few policy makers are willing to stick their necks out and break with convention.

The result is that seven years after the financial crisis, policy is still crippled by caution. Respectability is killing the world economy.

Read the rest at the New York Times…

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