It's hard to argue that we are not already running a wildly expansionary Keynesian policy when we are borrowing 30% of government expenditures. What would they have us borrow? 50%? 100%? Like with all failed liberal spending programs, their only answer is we didn't do enough. Take the War on Poverty. We have spent trilions. Turn sout being poor isnpt just a matter of needing a little extra helpo from the government. It involves acting in a responsible manner, not having kids you can't afford, not being a career criminal, not dropping out of school. We can't say any of that though because it is being judgmental and might hurt the feelings of those who keep demanding more of our money.
Ricter, you do realize that the conclusion of this article isn't simply that austerity won't work, right? In essence it is saying that the situation is so bad that austerity can't work. They aren't claiming that if Greece abandons austerity, then the situation can be fixed. They are essentially advocating bankruptcy. They are declaring the situation in Greece to be beyond hope. Borrowing more would simply increase the problem, and cutting back will theoretically slow growth so significantly that there would be minimal progress. Did you miss this line in the article? At the same time as lowering its forecasts for global growth, the IMF is now pushing for debt forgiveness for Greece... So while Krugman gloats in his wisdom, he seems to completely miss the point. Debt forgiveness is not a viable solution on a large scale. Bankruptcy only works if cases are rare and manageable. Can you imagine what would happen to the global economy if everyone was forced into forgiveness of our debt? What they fail to point out is that austerity is the appropriate course of action when debt:gdp is still around 100% and the economy is in a natural expansion phase. That is the situation we are approaching right now. Regardless of what is happening in Greece, it isn't too late to solve the US debt problem, but it will be if either of two things happens. 1) Inflation pushes rates above 6%. 2) Debt:GDP passes 150%.
Actually, what the article is saying in essence is that under conditions like the current financial crisis, austerity has never worked. Edit: if debt forgiveness became widespread a whole lot of moneylenders would have to get a job.
2x, where x=whatever we borrowed last time. Doesn't matter that it doesn't work. Doesn't matter how much we borrow. The answer is ALWAYS spend even more. If we could borrow enough to give everyone a trillion dollars, they still wouldn't be happy. People could build houses out of stacks of benjies, and that still would not be enough for the keynesians.
I agree that is what PART OF the conclusion is. It hasn't ever worked and can't work. It is the equivalent of the average family with income of $35K annual and credit card debt of $63K. And then to make matters worse that family's expenses are $38K annual. To carry on the analogy a bit further, the family then decides to sell all autos because they can't afford them. The problem is that Dad now wastes 4 hours a day riding the bus, when he could've been working. This is what your article is referring to. For every $1 saved by selling the cars, $2 of potential revenue is lost that Dad could've earned by working another part time job. They then drop their health insurance to save more money. But it only ends up costing them more in health care. In reality, even with dramatic cuts it will take 30-50 years to dig out. It could be argued that the only realistic way to pay down the debt is for both adults to work at least 60 hours/week. This will require additional expenses like reliable and efficient transportation and daycare for the kids. So they feel that their only hope of reducing the debt would actually require increased expenditures is some very key areas. This is the Keynesian theory. The other school says they should make dramatic cuts. But this requires lots of pain. They sell their 4 bdrm house and move into a 2 bdrm dirty apartment closer to work, and live off rice and beans. In the context of Greece, they live in poverty as a nation. No frills, while at the same time working 60 h/week until that $63K is down to a manageable $30K and their household income grows to $60K. This method would also work for Greece but they aren't willing to get that dramatic. They are stuck in the middle of the two where neither plan has a chance at working. They aren't willing to make the kind of drastic and specific spending cuts necessary to fix the situation. At the same time they aren't good enough at management to figure out the best places to utilize additional stimulus money. The only option left is bankruptcy. That is exactly what the article concludes as well. What it fails to mention is that if the family would've moved to correct the problem when they only had $30K debt, it could've been fixed without bankruptcy.