Well, heavy stuff, to be sure. Prof. Krugman suggests
(but he gives credit for it to Larry Summers) that the US economy has been in a
mild depression since about 1985; an economy of inadequate demand which only
gets anywhere close to full employment when it is being buoyed by bubbles.
From 1960 to 1985, Prof. Krugman says, US household
debt relative to income was relatively stable but it rose rapidly and inexorably
from 1985 to 2007. Yet even with households going ever deeper into debt, the
economy’s performance over the period as a whole was mediocre at best.
Now I am confused. On one hand, Prof. Krugman seems
to suggest that not even rapid and inexorable spending by consumption-addicted
and no-fear-of-debt-having American consumers could generate sustained economic
strength since there was a problem with the underlying economy. On the other
hand, I read almost every day a piece by Prof. Krugman where he recommends
rapid and inexorable spending, albeit this time on the part of the state because
consumers have run out of their own money while the state can always spend
other people’s money. Hmmm.
What does that have to do with Greece?
Well, I have always been puzzled by the following.
Everyone seems to be in agreement that the Greek state had gone overboard with
spending in the last 10-15 years, particularly after 2006. But the reverse
question would be a what-if question. What if the Greek state had not done all
that spending? What if the Greek state had not increased public employment so much,
particularly after 2006?
It seems to me that the Greek state had no choice but
to go overboard with spending. Otherwise, the destructive side effects of the
Euro (declining domestic economic value creation; GDP decline; rising unemployment)
would have become apparent much sooner. If I recall correctly, in 2009 not even
a 15% budget deficit (if that is not a stimulus then I don’t know what is!)
could prevent the GDP from declining!
What explanations does Prof. Krugman offer about this
mild depression in the US economy since about 1985? One is slowing population
growth. But the really interesting factor which Prof. Krugman notes is the
second one – persistent trade deficits!
A trade deficit always implies, at least to a certain
degree, an export of jobs. Obviously, a country like Greece cannot avoid importing
cars when it does not produce cars. However, if the US is importing cars which
it previously produced domestically, then the corresponding jobs have been
exported. First the jobs are lost (in many cases forever). Then employment
becomes unstable. Then unemployment will persistently increase UNLESS there are
consumers who rapidly and inexorably overspend (borrowed) money and UNLESS
there is a state which takes over that overspending once the consumers
themselves run out of steam. But what kind of an economy is that when you need
bubbles to keep it afloat?
I still remember Ross Perot’s warning – when he first
ran for President in 1992 – that the US would have to be very careful with its
trade position. At that point, the issue was NAFTA which Perot opposed because
he felt it would further deteriorate the US’s trade balance. He warned of a
‘giant sucking sound’ which would be heard as American jobs left the country to
other countries where they would produce exports to the US. His analogy was:
“Our children will be selling hamburgers to each other and pay for them with
money borrowed abroad”. Does anyone recognize similarities with Greece?
Back in the early 1970s, I discussed the American
import situation with a colleague who was in the same training class at an
American bank. His position was: “If the Japanese want to work 18 hours a day in exchange for us signing promissory notes, that’s fine with me!” Well, not
having to work in exchange for signing promissory notes would be fine with
everyone if those promissory notes could be signed forever and if they would
never be presented for payment. And, ABOVE ALL, if the export of promissory
notes were not accompanied by an export of jobs.
Returning to Prof. Krugman, I could perhaps accept
his point (low interest rates; high public spending) with regard to the US
economy because that economy is so huge, has such productive capacities and so
much innovative and enterprising energy that even artificially increased demand
might lead to positive consequences.
With regard to Greece I don’t see it that clearly. I
still maintain that the first priority for Greece, as a country and as a national
economy, has to be to increase productive capacities, build up new ones,
unleash innovative and enterprising energies, etc. If only aggregate demand is
increased, ceteris paribus, it will simply be a return to the past – increased imports,
increased trade and current account deficits, increased demand for foreign
funding and, at the end of the day, renewed external payment problems.