Paul Krugman: What Greece Means

Paul Krugman: What Greece Means:
Who's really trying to turn us into Greece?:

What Greece Means, by Paul Krugman, Commentary, NY Times: So Greece has officially defaulted on its debt to private lenders. It was an “orderly” default, negotiated rather than simply announced... Still, the story is far from over. Even with this debt relief, Greece — like other European nations forced to impose austerity in a depressed economy — seems doomed to many more years of suffering.

And that’s a tale that needs telling. For the past two years, the Greek story has, as one recent paper ... put it, been “interpreted as a parable of the risks of fiscal profligacy.” Not a day goes by without some politician or pundit intoning, with the air of a man conveying great wisdom, that we must slash government spending right away or find ourselves turning into Greece, Greece I tell you. ...

But what Greek experience actually shows is that while running deficits in good times can get you in trouble ... trying to eliminate deficits once you’re already in trouble is a recipe for depression.

These days, austerity-induced depressions are visible all around Europe’s periphery. Greece is the worst case, with unemployment soaring to 20 percent... But Ireland,... Portugal and Spain are in similarly dire straits. ...

This was not what was supposed to happen. Two years ago, as many policy makers and pundits began calling for a pivot from stimulus to austerity, they promised big gains in return for the pain. ...

You may ask what alternative countries like Greece and Ireland had, and the answer is that they had and have no good alternatives short of leaving the euro, an extreme step that,... if you ask me, Greece is rapidly approaching. ...

But ... America does have an alternative: we have our own currency, and we can borrow long-term at historically low interest rates, so we don’t need to enter a downward spiral of austerity and economic contraction.

So it is time to stop invoking Greece as a cautionary tale about the dangers of deficits; from an American point of view, Greece should instead be seen as a cautionary tale about the dangers of trying to reduce deficits too quickly, while the economy is still deeply depressed. (And yes, despite some better news lately, our economy is still deeply depressed.)

The truth is that if you want to know who is really trying to turn America into Greece, it’s not those urging more stimulus for our still-depressed economy; it’s the people demanding that we emulate Greek-style austerity even though we don’t face Greek-style borrowing constraints, and thereby plunge ourselves into a Greek-style depression.