Tags: Krugman | US | Austerity

Krugman: What, the US Practice Austerity? Forget It!

Tuesday, 15 Nov 2011 08:12 AM

Will the United States ever embrace austerity to avoid a European fate? Forget it, says economist Paul Krugman.

Europe's woes do not reflect the failure of welfare states in general, nor does Europe's financial crisis make the case for immediate fiscal austerity in the United States.

"It's true that all European countries have more generous social benefits — including universal healthcare — and higher government spending than America does," Krugman writes in The Houston Chronicle.
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"But the nations now in crisis don't have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer, one of the few countries whose GDP is now higher than it was before the crisis."

krugman200.jpg
Paul Krugman
(Getty Images photo)
Before the crisis, Krugman notes, "social expenditure" — spending on welfare-state programs — was lower, as a percentage of national income, in all of the nations now in trouble than in Germany, let alone Sweden.

"The big determining factor for interest rates isn't the level of government debt but whether a government borrows in its own currency," he says. "Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy's 7 percent."

Britain's fiscal prospects look worse than Spain's, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent, Krugman points out.

"The moral of the story is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas," Krugman says. "If we listen to those ideologues, all we'll end up doing is making our own problems — which are different from Europe's, but arguably just as severe — even worse."

Meanwhile, Mario Monti, Italy’s premier-in-waiting, faced political resistance on forming a Cabinet as his market honeymoon turned sour, with Italian yields surging amid concern he’ll struggle to tame Europe’s sovereign-debt crisis, BLoomberg reported Tuesday.

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Will the United States ever embrace austerity to avoid a European fate? Forget it, says economist Paul Krugman. Europe's woes do not reflect the failure of welfare states in general, nor does Europe's financial crisis make the case for immediate fiscal austerity in the...
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