The austerity debate for debt ridden European nations has degenerated into mudslinging among renowned economists, and illustrates how Ivy League sophistry and the mainstream media are undermining economic recovery in Europe and America.
Capitalizing on the financial crisis, Harvard economists Kenneth Rogoff and Carmen Reinhart accomplished great fame claiming ownership to an unremarkable idea: big national debt causes big national problems.
International economists have long known that excessive borrowing can slow growth and instigate collapse.
Nations with persistently large trade deficits consume more than they produce. Like homeowners successively refinancing mortgages to pay for reckless spending, eventually, they run out of banks to fool. However, if a nation borrows to effectively build infrastructure and industry to produce more and service its debt, then things can work out.
Worse, Rogoff and Reinhart proffered the amazing statistical finding that when national debt exceeds 90 percent of GDP growth substantially slows. Simply, there is nothing magical about 90 percent—Spain crashed without approaching that threshold.
A graduate student at the University of Massachusetts has uncovered errors in their computations, and roundly discredited the “90 percent” rule.
Krugman wrote, the Harvard professors “haven’t just lost their canonized status, they’ve become the object of much ridicule.” Outraged, the pair accused Krugman of “uncivil behavior.”
Krugman may be intemperate, but he is right about their standing among economists.
However, EU policymakers continue to use the Harvard duo’s pontifications to sentence Greece, Spain and other southern states to extreme austerity and endless depression rivaling the 1930s in depth and human tragedy.
All of the burdens of reforming Europe’s dysfunctional economic arrangements are cynically imposed on its poorest members. Meanwhile Germany resists culpability for its protectionist machine that abuses the single currency to amass huge trade surpluses, and transfer the pain of slow growth and high unemployment onto the South.
Without genuine structural reform—including an end to German mercantilism—the South can’t recover, and Germany will be fated to much slower growth.
The mainstream media is culpable—it has happily celebrated and offered Mr. Rogoff a platform for his Economics Book of Revaluations—but not nearly enough space to advocates of policies that would steer Europe away from its ruinous choices.
Mr. Krugman has his own sins to repent and with potentially disastrous consequences on this side of the pond.
Every economist knows, big government deficits will boost GDP and employment in the short term. However, if an economy is bedeviled by laws that promote tax avoidance instead of sound investment, an educational system that leaves young people with heavy debts but without marketable skills, and a health care system half again more expensive than foreign competitors, it will grow too slowly and eventually face a debt crisis too.
After five years of $1 trillion deficits, the United States is growing at half the pace it did during the Reagan years. Yet, President Obama advocates more big spending on jobs, bigger spending on student loans and even bigger spending for the broken health care system—all the time he ignores threats to national sovereignty posed by dependence on Chinese credit and imports all this requires.
Small wonder. On the pages of the New York Times, Mr. Krugman endlessly supports more reckless borrowing without absolutely conditioning Obama deficits on fundamental reforms.
The political right is correct about one thing. As long as the media promotes sophistry of Ivy League professors, enabling the irresponsible behavior of their favorite politicians, things are simply not going to get better, either here or in Europe, and our economies will eventually collapse into entropy.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland.