Krugman Vs. Rogoff on Austerity and Growth

Nobel Prize-winning economist and New York Times columnist Paul Krugman doesn’t suffer fools—or Republicans—gladly, especially if their arguments cut close to his deeply held Keynesian beliefs.

That’s why he’s engaged in brass-knuckles academic guerilla warfare with maybe the fastest rising star in economics since, well, Krugman himself—Kenneth Rogoff of rival Harvard University. (Krugman, of course, is a Princeton man.)

Rogoff, along with Carmen Reinhart of the Peterson Institute (and sometimes her husband Vincent), has laid out a way of looking at this crisis fundamentally different from Krugman’s own.

Rogoff and Reinhart have studied financial crises going back over centuries and concluded it takes years  for countries to recover their previous growth because of all the debt that needs to be worked down.

But they also found that when public debt levels get too high—say, 90% of GDP—economic growth falls off by one percentage point a year. It becomes a negative feedback loop: As growth declines, it gets more and more difficult to get out of debt. It also makes it harder to justify big spending of the kind Krugman wants to jump start the economy.

Rogoff and Reinhart’s work also would suggest putting in long-term debt reduction plans, Krugman’s hated “austerity” of the kind that he correctly points out isn’t working in Europe now.

Paul Krugman speaks at the Commonwealth Club in San Francisco. Photo: Flickr/Ed Ritger.

So, Krugman has attacked the Rogoff-Reinhart 90% debt  paper for being “not up to the standard of the other work. And yet Ken is leaning hard on that paper to justify his pro-austerity position.”

He also wrote:

I’m not denying that high debt can be a problem; but I think we need to be careful in assessing simple correlations.…It’s not so much that bad things happen to growth when debt is high, it’s that bad things happen to debt when growth is low.

Rogoff fired back recently:

With many of today’s advanced economies near or approaching the 90%-of-GDP level that loosely marks high-debt periods, expanding today’s already large deficits is a risky proposition, not the cost-free strategy that simplistic Keynesians advocate.

Hmm. I wonder which “simplistic Keynesians” he’s talking about. Any ideas?

When Krugman and Rogoff faced off on Fareed Zakaria’s GPS on CNN last year, their differences couldn’t have been starker. (You can watch the show and read a transcript here.)

Said Rogoff:

I think it’s not so clear that Keynes was right. I mean, there have been decades and decades of debate about whether digging ditches is such a good idea…When the government does really useful things and spends the money in useful ways, it’s a good idea. But when it just digs ditches and fills them in, it’s not productive and leaves you with debt.

And Krugman:

There is a huge overhang of debt, which is, at least as I see it, exactly the reason why we need very activist government policies.

Kenneth Rogoff at Davos. © World Economic Forum/Photo by Christof Sonderegger

Debt-ridden countries like Greece and Portugal are chaffing under austerity plans imposed by the European Union, and new French president Francois Hollande has called for more pro-growth policies. President Obama is pushing for more stimulus in the US, while Republicans have called for tax and spending cuts, so we’ll have a stalemate through the election.

The solution is obvious: spend on useful infrastructure over the next two or three years, then phase in long-term debt reduction after that. I actually think Rogoff and Krugman might agree to that, but getting them to admit it publicly may be only slightly less difficult than getting Democrats and Republicans to make a deal.


, , , , , , , , , , , , , , , , , , , , , , , , , , ,

6 Responses to Krugman Vs. Rogoff on Austerity and Growth

  1. Neil June 15, 2012 at 4:37 am #

    Sure, spend a little more for now and THEN phase in some debt reduction. Nice one. Ever passing the buck down the line.

    Reality: suck it up and start paying the piper NOW, before it’s too late. Can’t deal with it? Too bad. Reality doesn’t bend for you. Got it?

    Are you ready to be a grownup yet?

  2. Alex June 15, 2012 at 2:22 pm #

    “The solution is obvious: spend on useful infrastructure over the next two or three years.”
    What kind of assertion is this? The government should ALWAYS spend on useful infrastructure, not only “he next two or three years”… This is why it is the government doing it. The government is there to provide “public goods,”those goods that provide a positive externality, and would not be provided in a private market, and thus, after a good cost-benefit analysis, the government builds bridges, builds highways, repairs streets, builds schools. But this should be done within your means, prioritizing projects.
    In addition, Krugman contradicts himself: he says “there is huge overhang of debt,” and so we need MORE debt, so we can add to this overhang? With such statements he wants to be considered seriously?

  3. E. Swanson June 16, 2012 at 7:03 pm #

    Back in the 1980s when I began to study climate change, one of the main model builders noted that when two models produce different results, they can’t both be right, but they can both be wrong. The climate models have been improved considerably, but with economics (which claims to be a science), we are still arguing about what was the best way to fix the Great Depression, instead of asking whether the economic model(s) are correct. After the 1973 Arab/OPEC Oil Embargo and again after the 1979 Iranian Crisis, the world’s industrial economies were hit with Stagflation. The economists of the day had no clue as to the reason, perhaps because their models no longer provided an explanation.

    I suggest that the problem is the basic assumption of economic theory that our economic system exists in isolation from the natural world. In economics, the environment and resources are considered to be “externalities” when the obvious fact is that all human productive activity resides within the Earth’s natural ecosystems and can not be separated from it.

    For example, every human’s efforts are “powered” by the food we eat and all of that is derived from plants, which capture sunlight in ways which are analogous to solar collectors. All economic activity is based on agriculture and yet economics treats land as an input for the economic system, just another resource to be processed and consumed by development of resources or used for building roads, houses and factories.

    Corn-based ethanol is a prime example of this, as some 40% of our corn crop is devoted to ethanol production. Large areas of land are “sacrificed” for short-term economic gain, such as the mountains cut down to mine coal and the areas polluted with toxic chemicals.

    Worse, the resources under the land, particularly fossil fuels, are also being consumed and economics apparently does not consider that these resources are finite and thus once consumed, can not be replaced.

    This situation is particularly acute with regards to oil and there is considerable evidence that world conventional oil production is near peak, if that point hasn’t already passed.The rise in world oil prices which hit maximum in 2008 was certainly a contributing factor, if not the trigger, to the crisis we are now experiencing. In 2011, the price of oil rose again and the average price over the year was greater than that seen in 2008.

    Traditional economics tells us that as supplies of a resource decline, prices rise and other resources will become available to substitute for the lack of supply. With fossil fuels, this may not be possible, as conventional oil was the easiest to produce and thus the lowest cost supply.

    After Peak Oil, the cheap oil (in real terms) will be gone and what replacements are available will cost more. Of course, if those replacements are other fossil sources, they will also be depleted. As the cost of renewable sources depend on the cost of energy used to make them, the real cost of renewables can also be expected to climb as well. We may hope for some magical breakthru from science, but it’s been almost 40 years since OPEC’s wake up call and there isn’t an obvious substitute on the horizon.

    As long as our economic thinkers continue to ignore the fact that economic activity is an “internality,” we will continue to witness more pointless discussions about what to do going forward. To me, It’s rather like watching a video conference on the Titanic where the discussion is caught up in selecting who will sit where at the conference table as the sea level slowly rises outside.

    The media is filled with discussions about the need for economic growth when the reality could well be that growth is no longer possible because of the lack of resources. If growth can not keep pace with population increase, output per capita will decline. If growth stops, we will most likely fall into a Zero Sum economy, where growth in one nation will come only as other nations decline as resources are shifted away from the weaker to the stronger nation. Such a scenario can only result in great pain and suffering, such as we are witnessing in Greece and Egypt.

    The serious doomers suggest that today’s world population of some 7 Billion may not be sustainable without fossil fuels and a population crash will necessarily result. I’m afraid that we “live in interesting times,” as the Chinese would say.

    • HowardRGold June 17, 2012 at 4:35 pm #

      Very thoughtful comment, and I agree with your point about “externalities”: Economists define it that way when they can’t get something to fit in their models. It’s what the finance theory professors did before the market crash, only proving that markets weren’t always rational and efficient.

      Thanks and keep reading the Independent Agenda!

  4. fyzzics June 25, 2012 at 10:12 pm #

    Howard, Krugman has already stated multiple times that once the economy is running again and employment is back up, we should be working on deficit (and debt) reduction, which really comes down to controlling health care costs. He would definitely agree with your final paragraph. The only problem is getting the political system to deliver that infrastructure spending.


  1. Rogoff and Reinhart's Screw-Up May Undercut Case for Austerity | The Independent Agenda - April 17, 2013

    […] Critics like Nobel Prize-winning hyper-Keynesian Paul Krugman and progressive economist Dean Baker have argued that slower economic growth causes higher debt, not vice-versa. Krugman also grumbled about the limited data set in the original Rogoff and Reinhart paper, so he can now say his four favorite words: “I told you so.” […]

Leave a Reply