Paul Krugman is no left-wing hack trying to get attention. American economists should take heed to what he has to say…
Paul Krugman has a warning for Europe: Continuing to wage economic war on yourself in the form of austerity will have ugly and violent consequences. Not that they’re listening — austerity is far too popular with the Very Serious People for them to abandon it. But Krugman has this incredibly annoying (if you’re a conservative) habit of pointing out how the Very Serious People that love the idea of austerity keep cherry picking history:
Try to talk about the policies we need in a depressed world economy, and someone is sure to counter with the specter of Weimar, Germany, supposedly an object lesson in the dangers of budget deficits and monetary expansion. But the history of Germany after World War I is almost always cited in a curiously selective way. We hear endlessly about the hyperinflation of 1923, when people carted around wheelbarrows full of cash, but we never hear about the much more relevant deflation of the early 1930s, as the government of Chancellor Brüning — having learned the wrong lessons — tried to defend Germany’s peg to gold with tight money and harsh austerity.
And what about what happened before the hyperinflation, when the victorious Allies tried to force Germany to pay huge reparations? That’s also a tale with a lot of modern relevance, because it has a direct bearing on the crisis now brewing over Greece.
After World War I, Germany was economically crushed by the British and the French. They wanted Germany to pay them back for the cost of the war and Germany was powerless to resist. The burden of all that debt forced Germany to enact brutal austerity measures and that, predictably, resulted in a massive and prolonged depression. The resentment and desperation this caused led directly to the rise of the Nazi Party and we all know what came next.
And yet, here we are, a little less than a century later and the European Union is imposing crushing austerity on Greece and several other countries (but Greece got it the worst). This, again predictably, has led to massive recession and/or depressions. But the European Union refuses to let up:
Despite this catastrophe, Greece is making payments to its creditors, running a primary surplus — an excess of revenue over spending other than interest — of around 1.5 percent of G.D.P. And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus, and keep running huge surpluses for many years to come.
What would happen if Greece were to try to generate those huge surpluses? It would have to further slash government spending — but that wouldn’t be the end of the story. Spending cuts have already driven Greece into a deep depression, and further cuts would make that depression deeper. Falling incomes would, however, mean falling tax receipts, so that the deficit would decline by much less than the initial reduction in spending — probably less than half as much. To meet its target, then, Greece would have to do another round of cuts, and then another.
So, despite austerity’s dismal track record, we’re left with Greece and several other countries suffering through depressions and recessions and crippled economies. And what do we see happening? Right wing extremism is on the rise again because when people are angry, they turn to the person that tells them who to blame — usually immigrants, homosexuals and Jews. For a current example, see Russia.
In the case of Greece, we dodged a bullet as they just elected a left wing government to end austerity instead of a right wing one interested in promoting racism, hatred and violence. But Krugman warns that the EU needs to change its approach or they’ll be courting disaster:
In any case, European creditors should realize that flexibility — giving Greece a chance to recover — is in their own interests. They may not like the new leftist government, but it’s a duly elected government whose leaders are, from everything I’ve heard, sincerely committed to democratic ideals. Europe could do a lot worse — and if the creditors are vengeful, it will.
Will the Nazi Party rise again and start a another World War? Not bloody likely. But that doesn’t mean right wing extremists won’t take control and cause untold misery if the European Union blindly demands more austerity. In other words: Those who refuse to learn from the past are doomed to repeat it.