Krugman, Reinhart-Rogoff, and Austerity

The recent debate surrounding the studies by Carmen Reinhart and Kenneth Rogoff of public deficits and economic growth shows how alert academic critique can make a strong research finding fizzle down to a somewhat interesting footnote. By now we know that it does not matter a whole lot whether a country's public debt level exceeds 95% of its GDP. (I must add my own footnote here, see below at the *) Yet I am amazed at the level of influence initially ascribed to the 2009 Reinhart-Rogoff study, advocating austerity, until it was challenged. The US is a country where politicians – and conservative politicians in particular - are not exactly enamored of intellectuals. Somehow the claims of a scholarly article are said to have inspired the whole Republican stance in the congressional budget fights over the past half-decade. I find this overblown, and as Krugman suggests (April 29), there may be more to the story than just one academic article. But I am still puzzled by his conclusion that one side has won the debate.

Austerity, in Krugman's view, is simply wrong; stimulus is right. Still, I wonder what these terms mean, or more precisely, what they have meant in the public debates over the past four-five years. What is austerity? Strictly speaking it should be cutting or avoiding unfinanced spending; reducing public deficits. Yet this is not necessarily what all the rage in the streets of Europe has been about.

In Greece, austerity has meant people could no longer retire at 52, but had to wait until their early 60s like most other Europeans. It has meant stopping the payment of (public) pensions to thousands of people long dead. It has meant stopping the payment to persons unknown of salaries for government jobs held by nobody. It has meant reducing the salaries and pensions of public servants who have been living well above the medium standard of EU citizens elsewhere. It has meant Greeks suddenly had to begin paying taxes (- horrors! -) like ordinary people do everywhere else in the industrialized world.

In all Mediterranean EU countries, I have been hoping that austerity also should lead to fewer limos for elected officials, and no more life-long salaries for departed politicians, but I am not sure we're there yet. In Spain austerity means everybody now has to pay a certain (minor) share of the cost of their medication and of the cost of their medial treatment – like most people in northern EU countries have been doing for years. Austerity in Spain also has deprived people of free nosejobs and other cosmetic surgery, which has left me shocked.

Now, admittedly, the most sensitive part of austerity in Spain is that which is linked to unemployment. Austerity has reduced the number of government jobs in Spain. It has also opened the door for private companies to fire people they no longer need. So unemployment has increased.

While the first of these measures (cutting government jobs) is a must for a country dangerously in debt, it is not clear to me that Spain is really in that situation. The question is more what kinds of jobs are being cut. My impression from public offices in Spain like the mail service, public health centers and the public documentation services is that their slow-moving, impolite and haughty employees have no idea how privileged they are when compared to their colleagues in northern EU countries. Public money should - and can – simply be better spent.

As for private sector jobs, no company can survive a downturn without being able to lay off unneeded employees. These kinds of lay-offs for longer-term employees are now gradually becoming legalized in Spain, so there is no wonder unemployment increases. It will stay that way until the hoped-for upturn comes along.

In short, the debate about austerity in Europe, at least, has been confused by a lack of clarity as to what is meant by austerity. To me austerity should mean being strict about the kind of public spending one allows (and on that I continue to insist), but not requiring necessarily that there be no deficit in the budget. Deficits in the EU, at least, have to be limited, as required in the eurozone, otherwise euro countries will have to continue being bailed out by their neighbors. For this reason I see managing the public deficit as a macroeconomic task that cannot just be ignored in the name of the stimulus. It is an EU-member government's overarching responsibility.

Which again means we are in the hands of the politicians. Given the quality of politicians these days – whether in Europe or the US – we can only pray.

* Now that Reinhart and Rogoff have published their corrected figures, their original claim seems to hold up. A 1% difference separates growth in countries indebted above 90% of GDP (lower growth) from countries with a lower indebtedness (higher growth).

After Syria

The past two years the news out of Syria have been so dismal that I have not been able to face it, even in the minimal sense of writing about it. One reason: There can be no quibble about what the great powers have decided to do - they are wisely staying out of the fray. All of them. Their motives may differ considerably. But in such a situation there is nothing much anybody can do from the outside. This is another reason why there is not much to say - it only proves the old, tough lesson that a people must gain its freedom - and preserve it - on its own. 

Libya may have proven the opposite, acording to some. That is to say, that the West saved Libya from the Gaddafi clan. The Nato intervention was fairly clearcut, to me an action as legitimate and well-founded as anybody might wish. Beyond that, I believe Libya was sufficiently chaotic to prove nothing about such matters. There were interventions from a number of different parties, actors, or sides, whatever you prefer to call them. Some were invited. Others not. There was strong action from inside. Nevertheless, the main thing in Libya was - and is - that there was no real inner core, no cohesive group big and strong enough to gather a force transcending the clans and tribes, which is why the instability continues. Is it much different elsewhere in the Middle East?

The collapse of the Arab spring should not be over-interpreted. Granted, Tunisia has advanced farther along the way, yet has its own troubles. Egypt even more so. There can be little doubt that attitudes inculcated by Islam is the main source. As long as no strong voice is courageous enough to take whatever there is of humanity in Islam and merge it with some sense of moderation, the Middle East mess will continue, and be even worse than it was before Tunisia took to the streets and Mubarak fell. One strong, courageous voice can do much. We have not heard that voice yet.

So where is the glimmer of hope in all this?

Most of the governments of the Middle East are against Assad. Still, they cannot do much more about it than the great powers. Except prepare their own nation for a better fate. In the meantime, we can all watch - as we no doubt are doing - while Assad and Syria self-destruct. The only further hope I can see is the lesson that Syria must be the last Arab nation to go to the dogs like this. Those dogs, unfortunately, are home bred.