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.


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