Learning From Greece

The Greek debt crisis is a terrible, tragic story. It’s an object lesson for the rest of us, but what does it say?

Comments: 125

  1. Mr. Krugman rightly points out that patience and sound monetary policies and fiscal sobriety offer the best chances of steering out of the current morass into which we were plunged by eight years of drunken-sailor spending, tax cuts for the wealthy, and unconscionable laissez-faire ineptness on the part of GWB and his henchmen and billionaire cronies. We can expect more of the same from the current crop of right-wing Wall Street sycophants.

    The primary difficulties facing the Democrats and the Obama administration (discount any semblance of assistance or adult contributions from the right) are the lack of patience on the part of, well, just about everyone. Two days after the recovery act was passed, Republicans and their media lap dogs at Fox began screaming that it was a failure. Corporate moguls and avaricious bankers have no patience or inclination for planning for anything further away than the next quarterly report.

    As a country we are used to instant gratification. The right talks a great game about economic responsibility but in practice the present Republican party has overseen recession after recession and finally economic armageddon, since the days of Reagan's Voodoo Economics. Money never trickled down, as Reagan promised. He made sure it trickled up. To his buddies on Wall Street. Both Bushes carried on with that plan and left the rest of us to foot the bill.

    A good plan is essential. The will to see it through requires the kind of stern stuff that Republicans (and sadly too many Democrats) do not have.

  2. There are many lessons to be learned from the current plight of Greece. The most important one is the need to bring Goldman Sachs and its ilk under control. Just as GS, doing God’s work, sold worthless mortgage backed securities as AAA rated and simultaneously bet against them, it also helped Greece hide its debt and is now betting against Greece with shorts and credit default swaps. The tentacles of these giant financial vampire squids need to be severed, and all their zero-sum-games brought under strict regulation. Failing this, the massive concentration of wealth into the hands of a few will continue impoverishing the rest, and that will certainly lead the US to join the ranks of the third world nations.

  3. The trouble is the tightwads (a) are not very smart, (b) are not interested in learning even the facts they're capable of grasping & (c) think regurgitating party talking points trumps EVERYTHING.

    As an example, Ezra Klein noted yesterday that in a 13-word sentence -- "One of the things in the health bill is 16,000 additional IRS agents." -- Newt Gingrich was able to pack in four falsehoods. Pretty impressive. Republican fiscal genius Paul Ryan picked up Newt's talking point & made it worse, suggesting federal agents would come knocking at your door soon. In another example, Jonathan Chait caught healthcare "expert" Jeffrey Anderson just deleting the part of a sentence that disproved his point -- a false point Ryan went on to parrot.

    You can't reason with people like that. Yet they are the people who make consequential, irresponsible decisions & block responsible ones, all the while shouting out gibberish to frighten their own base into sharpening their pitchforks.

    In this country, we call that democracy!

    The Constant Weader at www.RealityChex.com

  4. Dear readers,


    I just cannot swallow Mr. Krugman comparing Greece today with US after the World War II.

    First, Greece is just a small nation and economy and not as diverse in relation to the US.

    Second, the US was the sole “winner” in the War whereas Greece today does not have any political advantage whatsoever.

    Third, today we are facing with the global financial crisis “manufactured” in the US, very different from the period after the War. Moreover, in the period after the War, the world is basically on fixed exchange rates where no central banks could print money at their discretion.

    Mr Krugman needs to correct this apple-and-orange comparison.


    Mr Krugman seems to suggest that inflating the debt is the way to go for Greece. Hence, he’s assuming that while US could get away with it last time, Greece could also get away with it today. He’s assuming that people today are as gullible as those in the post-War period and he’s assuming that Greece today is as powerful as the post-War US!


    He’s also presuming that people from Greece cannot move out of Greece to search jobs elsewhere in the European Union. Hence, he’s assuming that labor markets are rigid, which is not the case in the real world. Yes, there are cultural and language barriers but these are the things for the Greece people to face and perhaps this crisis could be a blessing in which it helps people to be more adaptable.


    Krugman is also assuming that Mid East and China would continue to pour in as much funds as before to the US government in the future when US inflates away its debt. Else, he must be assuming that Americans will save enough for the government to borrow, or the people will be willing to pay taxes in the form of nominal taxes or inflation tax so that the government can spend as much as it likes for the so-called short term.

    He has forgotten about the rising euro or even renminbi wherein people can invest their funds. He has also forgotten about other commodities or assets in which the lenders today and diversify their funds out of US securities. He also does not want to admit that Americans are generally spendthrift when compared to the Chinese or Japanese which brought about a big hole in the current account.

  5. ..."But what are the lessons for America? Of course, we should be fiscally responsible. What that means, however, is taking on the big long-term issues, above all health costs — not grandstanding and penny-pinching over short-term spending to help a distressed economy."

    Okey dokey, Professor Krugman, you have given us an excellent overview of how to avoid the "Greek Dilemma" and further help our distressed economy! However, I am sure you have considered the "Republican Right Wing Dilemma"--which may be an even worse problem! Since the wingnuts have decided that they will oppose anything Obama and his people propose, how in the world do you think America can possibly end up with a sane fiscal policy?

    Have you and your fellow Nobel economists discussed this issue? I and many others) would love to know how (and if) you think it can be dealt with!!!

  6. Essentially what you wrote is that Obama and the Democrats intend to "inflate away the debt". While that comes as no surprise to some of us, it will be a surprise to people who listened to and beleived the Democrats. Thanks for the honesty.

  7. In addition to the lessons for America mentioned, I encourage readers to do some research on how monetary policy is conducted in the US, especially how money and debt are actually created. This is an incredibly important issue that profoundly impacts every participant in the economy, yet relatively few people have any concrete understanding of the process. I hope people consider that there might be alternatives to the current system that relies solely on the Federal Reserve to manage the nation's money supply - monetary alternatives that co-exist with our money/debt creation mechanism, grant people and communities greater control over the wealth they create, and increase incentives to individuals to produce, work and create value. For starters, Douglas Rushkoff's book Life Inc. proposes interesting alternative monetary systems and Washington's Blog has been exploring how money and debt are created in numerous posts of late.

  8. So, Krugman's plan for us to return to "rapid growth" is:

    a) cap-and-trade which will "only" cut growth by 25-30% per year per Krugman's article in Sunday NYT?
    b) start universal health care with NOTHING done to cut escalating medical costs?
    c) say that having 47% of households paying ZERO income tax is just fine?
    d) rely on "green jobs", which include solar power, built in Asia, and wind mills, built in China? Huh?

    Once you erase the phony, financial bubble, the U.S. economy has been stagnant for 17 years. Where, Mr. Krugman, is the growth going to come from?

  9. This is a grim lesson in the hidden costs of doing business with Goldman Sachs. A lesson we haven’t learned yet, but will.

  10. Apples and oranges. #4 is correct, the USA and Greece are not any way comparable.
    Mr Krugman's analysis glides over the real major factor which is wrecking the American economy: the military-industrial complex. It gobbles up half the Federal budget (actually more, Enron-style bookkeeping keeps lots of its costs off the balance sheet); it gobbles up half the oil imported by the US. It's influence bends the politics of local govt around the nation (bases, plants, etc.)
    The US is 5% of the world's population; it spends half the world's investment in war-making commodities.
    It is the elephant in out public living room. And yes, it profoundly effects the economy, as well as the national psyche and political discourse.


  11. any excuse not to blame socialists and unions. no, its germanys fault. and goldman sachs. Of course.

  12. So, as wars end the economy begins to recover as in 1946. Good thought and wouldn't it be loverly if the wars we are in ended and we all began the recovery? I guess one can hope for miracles and when they happen, tax them. Is that the future? Sounds like winning the lottery for a retirement plan.

  13. The problem we have in this country is we don't learn the right lessons as this Krugman piece shows.....

    Germany is absolutely doing the right thing. Right after Greece gets bailed, the rest of PIIGS (Portugal, Spain, Italy) will come begging and these are much bigger economies than Greece. Where do you stop? How much money do you throw down the drain to prevent the inevitable?

    The real solution is not to spend beyond your means. And this lesson is universal, applies to us just as well to anyone else.

    But Krugman is a big Keynesian spender. No wonder he doesn't like Germany's policies.

    I just wish Germany still had its currency. I would move my assets there in a heart-beat. At least my hard-earned savings wouldn't be inflated away to nothing, as Krugman would like to have it.

  14. What does it say?

    Better keep Wall Street in line with some real laws...or they own you.

    Better find a real way to fund small business...because the banks are not.

    Better get people working using government funds or as you said...

    '...all bets will be off.'

  15. The difference between 2010 Greece and 1946 America is this: the US emerged out of WW2 with an undamaged infrastructure, and was the factory to the entire world, especially war-devastated Europe. That massive productive growth is what drove up GDP. Unfortunately Greece (and the rest of Club MED) cannot compete with the productive Germans, Chinese and Japanese. The US needs to learn that lesson before it is too late. Financial wizardry is no substitute for good old fashioned manufacturing.

  16. It seems that Republicans and Tea Partiers and Wall Street want to bring Obama's America down anyway, and the Democrats are too supine (and bought by the same special interests) to resist them.
    Unfortunately Obama's America is everyone's America though many Americans it seems long to return to a mythical past that is mich like Happy Days.

  17. In one of your blog posts, you made a comment that is germane to this topic. You said, "The basic picture of the federal government you should have in mind is that it’s essentially a huge insurance company with an army; Social Security, Medicare, Medicaid — all of which spend the great bulk of their funds on making payments, not on administration — plus defense are the big items."

    You also pointed out that the conservatives are deluded and think there are painless spending cuts from imaginary sources.

    The American public needs to be told often enough that they can recite those main sources of government spending. Perhaps then they will begin to clearly see why health care costs must be controlled and unite behind political demands for such controls.

    The advocates of wild-west-predatory-free-market economics will throw up all sorts of deflections and distractions to keep the government from taking prudent, limited, steps to control the runaway costs. If the public knows what the expense items are, however, they should be fairly immune to fatuous claims about what needs to be cut.

    For example, there will be calls to cut taxes for business. Some, such as Senator DeMint, want to cut business tax rate to 25%. I call these guys the free lunch bunch. They seem to think there is a free lunch, that the public can get the basic services without paying for them.

    I'm also tempted to mention defense spending but even as we withdraw from our war involvements, we have a burgeoning need to refurbish and replace worn out military equipment.

    This cost control business must be coordinated with iron-clad, limited-term, legislated, discipline to follow some spending control rules. No, we don't want to repeat FDR's 1937 mistake. Yes, we've got such a severe problem with job creation we need to continue to push cash into job creation projects to get more currency circulation.

    However, overall, it comes down to the simple statement that the American people and our leaders cannot delude themselves or we'll destroy ourselves. We can no longer delude ourselves with, "We'll fix it when the time comes." As we shift into recovery, we must pay down debt.

    And, we cannot afford another Wall Street meltdown. We need strong banking and financial regulation.

  18. I think Krugman's comparison of US after WWII and Greece is just to show the fundamental DIFFERENCES, not SIMILARITIES. My understanding is that Germany finally agreed to something and Greece will not collapse but it will not be too good over there. The leftists will surely try to take advantage of the situation and create a lot of trouble.

    I really do not quite understand what Krugman's point is as far as our current situation is. So, I will just write a few words about his previous skeptical review of the Dodd's banking reform.

    Greenspan who, if I understand it correctly, would be given (OK, his successor) to deal with 'sub-prime mortgages' by this bill, completely rejected ANY responsibility for his policies during the crazy days of sub-prime mortgage and the 'creative investment instruments' Greenspan praised during these days.

    So, the Dodd's bill is no good if it depends on personal whims of the all-powerful Fed Chairmen and their assorted gofers.

    That is an immediate issue translating into a very specific task: should we support Dodd's bill or let it die?

    One thing at a time, Mr. Krugman.

  19. There's plenty of blame to go around on this one--especially predatory financial markets that want to make a killing by killing the Greeks. Greece needs to call the speculators' bluff. Go to the IMF and threaten to drop out of the euro. That should get the attention of the Frankfurt bankers.

  20. Comparison is a tricky thing, as the l9th c. romantics noticed--anything can be valued/devalued via juxtaposition.
    As to Greek debt, didn't their gov't cook the books--lie? Didn't large numbers of the population go along with this, actively and passively?
    Mr. Krugman: when will you explain, rationally, why a stockbroker with a so-so education makes, annually, seven-ten times a new teacher in the American south? When will you compare college Presidents, that have used every trick to dumb-down their faculty and enhance their public image, to con-artists like Robert Rubin?
    Really Mr. Krugman--the Greek people ought to rebel against their govt just as the American people ought to get rid of republicans and democrats alike. No false use of the "comparative" method. Finally, I would like to see you compare savings rates paid to seniors and profit-rates from banks that hold these savings. Democratic-party exploitation of power doesn't differ from Republican-party abuse.

  21. Some of those "inflation hawks" could care less about inflation. They're simply partisan screamers who are seizing on any and every issue to whip up fear for their own political gain. That is what the Republican has come to stand for.

  22. Hey, why don't we just guarantee all the Greek debt and merge Greece with one of our rock-solid U.S. banks? Wouldn't it be great to have a Bank of America, Chase, or Wells Fargo ATM machine at the Arcopolis? Think of the irony: Amidst the crumbling ruins of democracy's birthplace, the flourescent-lit glow of a 24-hour ATM machine, brought to you by the the U.S. government and your local bank.

  23. Inflation is going to really hurt too many little people. You can't have inflation without doing away with sales tax. What ever happened to tax-sheltered investment zones in the U.S.? Did that all go to residential and commercial building and none to manufacturing? Let's say they existed--every state gets two 50x50 mile zones (in their most overbuilt areas perhaps). Now do we see JOBS that pay taxable income? This concept is missing.

  24. In addition to the "Euro" issue. There is another lesson that needs to be pointed out. Countries esp. smaller countries cannot build entitlement and public welfare systems without setting aside the resources through taxes or duties beforehand.

    You pointed out the period of deficit reduction from '46-'56. I think the present situation is not comparable to that period because of three reasons.

    1. In the 1930s and 40s, the additional borrowing for public works or the wars was a one-time hit on the sovereign balance sheet. This time with large entitlements and exploding medicals costs exerts a continous downward pull on the government's balance sheet.

    2. The current deficit at 185% of the revenue cannot be closed by a recovering economy growing at the expected rate between 2-3%. The '46-'56 period was a period of superb growth.

    3. It will be very difficult to raise taxes (politically) in today's environment. The Great Depression and WW2 had created a climate where it was possible to have a top tax rate of 91% from 1944-'61.

  25. Dear Mr. Krugman,

    You forgot an important issue: Greece did not play fair and in fact showed very wrong figures and therefore undermined the whole euro structure.
    The USA is basically doing the same only its role allows to just print paper money (which eventually will be worthless and everybody else holding US Dollars will be the looser) as still having the role of world banker.

    If the USA will not have a better control over its budget policy it will be soon in trouble (and not only for cheap political reasons) also with the rest of the industrial world, who so far has paid for all the losses caused by the USA in the recent financial and home crises.
    To get money it is not sufficient to order the courts to open some cases against international companies doing business in the USA and milk them for billions. One day (hopefully soon) the same will take place the other way around too.

    Conclusion: What is seen in the USA is not very encouraging either.

  26. Paul...

    Ben is now printing up and "selling" over 100B every two weeks. This ensures that my child will be working her entire life to pay for the banks' bad debts and the bankers' bonuses. You can pretend all you want that we are going to get out of this mess over time, but, it isn't going to happen.

    In fact, pretending what has happened over the past two years is simply an extraordinary but normal stage of the business cycle is beyond insanity. Let's call it what it has been -- a brilliantly engineered and massive transfer of wealth from the middle class to the bankers in the waning days of the Bush administration. Less educated might call it the biggest theft in the history of mankind.

    Now, here we are, a galactic-sized debt that you believe we can grow our way out of......how?

    Our infrastructure, after ten years of complete neglect, is crumbling.
    Our education system has deteriorated to the point of no return.
    Our economy is in rubble.
    Our politicians are utterly clueless or totally compromised....

    And our media...our media.....is not covering anything that is actually happening in the economy. No, they are studiously averting their eyes from the strange goings-on at Ben's bi-weekly bond sales, in the precious metals markets (despite whistleblowers screaming at the top of their lungs), in our stock market which miraculously rises day after day on the amazing climb of after market futures markets every night -- despite rising foreclosures, 20% unemployment, 39.5 million on food stamps, and states and cities across the country careening towards bankruptcy.

    We are just one failed bond sale away from absolute chaos. And that little butterfly is going to flap its wings somewhere soon.

    When it happens, most people are going to be completely blindsided....and they will have all those, like you, who believe and support the "Extend and Pretend" and "Management of Perspective Economics" strategies to thank.

    The point of a free media is to protect a people from its government. At this point, its clear you guys are doing a lousy job.

  27. Disagree with your claim that America is being "fiscally responsible," Professor. Unless you're dull enough to believe the fraudulent figures handed to the CBO, you understand that the health legislation will not reduce the cost of health care or the cost of premiums but it will raise taxes. Since Obama took office, $2 trillion has been added to the national debt. Took Bush 4 years to run up a similar figure like and that was before the Democrats began controlling Congress in 2006. Then the spending really escalated as well as the sub-prime fiasco. That "urgent" stimulus bill has yet to cap unemployment at 8% and "create or save" 3 to 4 million jobs. And now the topic of a VAT has been raised. America's beginning to look a lot like Greece!

  28. We have had bad government economic policy for a long time, and under both democratic and republican administrations. Both have made bad decisions, poor regulations, poor regulators, poor leaders. It is time to clean this mess up. You do not have to worry about the inflation hawks, it is the people, independnets, tea partiers, that the democrats and the republicans need to worry about. The people want their country back. Healtcare and its impact on the debt will play out and we will make adjustments, but the real eye opener to all of us regular people on main street is that the majority of americans were against this bill, some thought it went to far, others not far enough, but we could not stop congress from passing the bill. We have to ask whose government is it, when it is not ours. Debt is the least of our worries.

  29. Sorry, but blaming the Germans is not fair. The rules for the Euro membership were clear. Greece -- with the help of Goldman & Co. -- opted to violate them, at their own peril.

    How popular would a bailout of say Mexico (upon real or perceived lack of discipline) be with American taxpayers?

  30. The numerous variables and complexities of global finance does not allow for straightforward approaches, Keynesian or otherwise, to solve the sovereign debt issues that exist therein. Furthermore, these topics are not areas of academic research that Krugman has spent years specializing in. This editorial represents his spin, which is just as biased as the opposing views coming from Fox news. Let's look beyond polarizing figures in the media who pretend to understand the problems and solutions needed to our economic woes, and focus on true experts who don't harbor extreme political agendas.

    In terms of sovereign debt issues, consider the views of Mohamed El-Erian, CEO and Co-CIO of PIMCO, and his most recent article on Greece found at:


  31. Since the United States is now incurring as much debt in one month ($333 billion in Treasuries were sold in March, and the budget deficit for February was $221 billion) as it used to incur for an entire year, is Prof. Krugman certain that the United States is really "penny pinching?" An odd way to be a skinflint. The CBO assures us that the United States will take on at least $1 trillion in debt each year for the next decade, driving the public debt to at least 100% of GDP. The Social Security fund is already in deficit, seven years ahead of schedule, right as the Baby Boomers start to retire. What level of debt would be sufficient to satisfy to satisfy Prof. Krugman? Twice this amount? I am not certain what lessons he is urging us to take from the Greek situation. Don't worry, we have our own currency and can inflate away our debt no matter how large? Then what does Greece actually have to teach us? Another hopelessly vague column with no focus.

  32. "America’s public debt will be manageable if we eventually return to vigorous growth and moderate inflation. But if the tight-money people prevail, that won’t happen — and all bets will be off."

    You're right but why do I have this sinking feeling that the tight-money people will not prevail?

  33. "... savage spending cuts and tax increases."

    In many countries, and from what I've read and seen, this applies to both Greece and Italy, the tax system is so corrupt that to speak of tax increases is just a joke.

    In the US, people often complain that the rich don't pay their share of the taxes. However, if you talk to a Greek or an Italian, they'll tell you that the rich don't pay any taxes at all, and never have.

    You cannot expect a government that is unable to collect taxes to do anything. It can't pay pensions, it can't pay interest on debt, and it can't do much of anything.

    The place to start is with drastic reform of the tax collection system. Talking about any other policies is a waste of time until the Greek government does that.

  34. There is this pernicious misconception floating around: that somehow economics must be after all a big morality play. That is, because Greece was profligate and spend-free, then the correct course of economics should of course be a good whipping via austerity and the wrath of the IMF so that these irresponsible Greeks be punished into good sense...

    Yet, countries are not people... the average Greek had little say on the policies of their country when it joined the EU, and the average Greek has little influence even now when their livelihoods, salaries, and pensions (even if too rich in our holier-than-thou opinion) are obliterated.

    So now that the future lives of children, small and middle businesses, the elderly, the handicapped, and the poor and barely middle class Greeks are thrown under the bus of fiscal responsibility the question to ask is...

    Who is profiting now as Greek burns, and who profited before as the crisis began to unfold?

  35. Dr. Krugman knows that inflating our way out of the debt problem means paying back our creditors with the nominal amount owed but with dollars worth less than what we were lent. I don't understand why we are okay with this idea.

    If someone borrowed money from us, wouldn't we want the value of our money back, not just some paper with the same numbers but less purchasing power?

    On a related issue, the debt we create is going to be paid by our children and grandchildren. How is it right to create debt to make our choices and lives easier but in the process burden those without a vote?

    A constitutional amendment for a balanced budget with exceptions for actual declared wars seems essential to reign in this government.

  36. Krugman keeps pushing debt as the way for us to grow ourselves out of the recession, counting on that growth, and inflation, to keep that debt from becoming a problem. That plan won't work.

    Why? Our addiction to imports, and our high cost of production, both in labor and regulatory cost/inefficiencies. Because of this, we have no engine for growth beyond the gov't borrowing money and dumping it into the economy. Most of the money the government borrows, flows quickly back out of the economy.

    His comparison to the post war era is telling. After WWII, American industry (which was the only major national economy not devastated by the war), ran full tilt for about 25 years, rebuilding not only the American consumer sector (which had stagnated through the depression and war), but the rest of the world, including the former axis nations, that was largely destroyed in the war. It was that influx of activity, which brough cash into the economy (instead of spewing it out as we do now) that caused the growth Krugman talks about. But we can't replicate that now. The rest of the world doesn't need our industrial capacity, and Americans tend to buy from cheaper sources abroad (mainly China).

    Currently our economy is based on consumption, importation, and debt. As long as it stay this way (and it can't for much longer before it implodes wholesale), we can never have lasting economic growth. We'll just go from stimulous to bust to stimulus to bust..., just like a cocain adict going though rehab, but never succeeding.

    We need to get the economy back a basis of production, exports, and savings. This will likey mean a significant hit in the short and medium terms. Our standard of living will have to come down, the government will have to reallocate resources to economically productive ventures (mostly education and infrastructure) and way from those that serve very little economic purpose (heath care and the elderly). But the items that have to go will have to go at some point anyway. However, once we get through the pain, we'll be in a much better position to compete with the rest of the world. It may also mean using various forms of protectionism to reincubate our stagnant industrial sector, and cutting regulations that don't allow it to compete on an even footing.

  37. Wouldn't it have helped their nation's situation if public sector employees in Greece agreed to some concessions? This is always one of those "it's such a small amount, it wouldn't matter" items that economists, unions, and academics like to gloss over, but I can't help but think that in an economy, as in an ecology, every part counts.

    Taking the lesson to heart, the public sector at the national level in this country should agree to a pay freeze for at least a year. That would include federal workers, elected officials, judges, and others. While it might be a "drop in the bucket", it would still be some savings that could then be used to support those who need it more right now, such as they massive number of un- and underemployed Americans from all walks of life.

    The lack of recognition that sacrifices need to be made by those who are fortunate to be employed, especially as public servants, is one lesson that should carry over to the U.S. for the near term.

  38. Prof. Krugman's message is decidedly mixed. He warns us against the dangers of a deflationary monetary policy, but how does deflation explain the mess Greece has gotten into? Greece has suffered from inflation.

    He contrasts Greece's problems with the situation the U.S. found itself in following World War II. America, he says, "inflated away part of its debt." Is that why deflation is bad, because it prevents countries from inflating away their debt? But inflating away debt is just a form of defaulting, a way of cheating creditors. Is that what Prof. Krugman recommends?

  39. So during World War II the government implored citizens to buy war bonds. After the war it paid them back with dollars that had lost 40% of their value. Ah the good old days, eh Krugman?

  40. What about Lehman Brothers?

    The best prospect is that the EU will demand strict regulation of all the bogus products that the Wizards of Wall Street invented over the last decade or so. The Republicans cannot filibuster the EU.

    And China does not care as long as we buy its manufactured products at the expense of our manufacturers.

  41. It was Mark Twain who said famously, "History doesn't repeat itself but it sure does rhyme a lot!"

    Right now we're right about 1930-31, when a false economic dawn led governments to relax and clamp down. We're about to make the same mistake again. We forget that it was the collapse of a bank in Austria that caused the second vicious stage of the Great Depression.

    Similarly, Greece seems also not to be a tipping point in terms of how it will affect the center in the US and Western Europe. Yet, every week this drags on reminds global bondholders that the US and all other westerm countries are far more indebted than they were in the 1930s. And, as Krugman points out in his post-World War II example, the US used inflation to bail its way out of heavy indebtedness. People, that's not something lenders really want to hear, especially from a country that's running trillion dollar deficits.

    Ominously, the differences from the 30s are not good. Consumers, always expected to bail out the economy when interest rates are dropped, are far more indebted than back then. Businesses are far more leveraged as well. Who's left? The Chinese?

    Krugman outlines the conundrum well but is afraid to state the logical conclusion. Governments are basically stalling for time in the hopes that a miracle will somehow bail us all out.

    But all miracles have already been tapped and Greece is the miner's canary telling us what lies ahead. If 2008 was the hurricane, then right now we're in the calm of the storm before it hits again, this time closer to home. To paraphrase another great American writer, Ask not for whom the bell tolls, it tolls for you.

  42. Why should Germany rescue Greece? You describe a nation that denied its need to rebuild its income generating base and instead just waited until imminent disaster while enriching its citizens on borrowed money. How can you honestly rationalize the notion of fiscal irresponsibility being shouldered by the responsible? It is absurd that Germany should be cast in any negative light. Default needs to be sent as a message to both debtor and lender.

  43. I fail to see the logic behind a spend and inflate approach to the current economic crisis. Especially when it seems that any inflation coming into the system will come from speculators working their "magic" on the price of commodities; especially core commodities like food, iron ore, and the like. This supply-side inflation is the result of the Fed's maintaining a policy of negative net interest. Banks are simply borrowing money at "historically" low interest rates and investing the in stocks, commodities, bonds, etc. to make a profit. This means that our trillions in tax dollars have re-inflated the banking system and the banking system is paving the way for supply-side inflation. At some point this system will lead to higher prices for consumers and the overwhelming majority of consumers are those of us who work for a living, which I guess, you are preparing us for and telling us this is a good thing.
    But I am still waiting for the answer to one question. How does a spend and inflate approach serve the interest of the average worker who spent the last 15 years playing by the rules, saving his money for his children's education, and paying his taxes?

    The value of any money he has saved during the last 15 years will be destroyed and the debt burden of his children will be increased. All done to preserve a system that does not serve the interests of the average American.

    If this is your idea of being a "liberal," then for the first time in my life, I am ashamed to call myself one.

  44. Please, please tell me that the Kruginator didn't just suggest that we inflate away our debt. Ouch! That's the worst thing that could happen to the middle-class and poor. But if you work for the likes of Goldman Sach (which is bringing down Greece and the EU), inflation is OK -- you can simply put your increasingly worthless dollars into stocks, bonds, credit-default swaps, foreign currencies, gold, etc. But if you're a middle-class peon, well, you're trapped in the dollar.

    Way to look out for the rich guys, Mr. Krugman.

  45. "German obduracy"? Honestly, Krugman, is there ever a point where spending and loose monetary policy is just too much for you?

    The Germans are one of the few (only?) western country to be behaving like grownups. It's anglo-american Keyensianism that's creating for us the mother of all asset bubbles -- much like the one you yourself called for after the nasdaq bubble burst.

    So the tightwad teutonics are throwing a wrench into the inflationistas plans, and so Lord Byron rides to the rescue of the cradle of western civilization once again, with what? This myth that "growth" comes from credit and that money is wealth. It's not. Growth comes from invested capital and increased productivity. Production is wealth.

    And Paul, you realize that those gains in GDP that demand-side fetishists like yourself, those don't measure real productivity unless you strip out inflation (as you allude to) and government spending.

  46. Paul,
    Read 13 Bankers or Judge Napolitano's newest tome.
    And you think that Washington is fiscally responsible? What is next a VAT? The cookie jars have been robbed so many times it makes catholic rape look pedantic. Another way to try to pay for things that haven't been paid for in the past. And a new way to pay for things that aren't affordable. Unlike Greece, we have a money machine that just churns out new crispy bills. Pretty to look at, but worthless. And the shill game continues. And Washington is held hostage by niggardly, stingy bastards that are too big to fail.
    And what about China offering to build rail systems in Caulifornia?
    Great! Right, Paul? Arnold's state is flat broke. Busted with pensions and illegals. And they sign on for a rail system with Chinese steel, technology et al. Pretty cool, right? The state is bankrupt, lies on a major seismic fault, and all monies come out of taxpayer (non-bronzed) individuals. You! and me!

  47. We know from the history of economic actions just what the results of deflation are. Politicians are justly afraid of devaluation and we are ourselves experiencing that in the housing market, job market, and loan market. Greece if allowed to go bankrupt will drag down the rest of the euro zone. Prices will deflate, there will be even higher unemployment than now, people will work for minimum wages just to survive and the rest of Europe will have to match those prices and wages. It might under the right circumstances attract investment just as China has done with its low wages and prices. Since Greece can not print its own money unless it leaves the Euro, it can not use inflation to get out of this. It is damned if you do and damned if you don't. Unfortunately it might also create civil unrest which is not unknown in Greece. That threatens the stability of the Mediterranean countries.

    At least the US is able to put money into the economy at present. We see a lot of complaining about bailing out the banks, but letting the banks fail would have been worse. One of the characteristics of the depression was the number of bank failures. The Glass-Steagal act was passed just to keep the commercial banks from engaging in risky behavior. Then after many years of lobbying, and finding a sympathetic Republican Congress, those restrictions were lifted with the Gramm-Leach-Blily Act, which was also a gift to Gramm's wife at Enron. Even the lesson of Long Term Capital Management was simply ignored and the regulators looked the other way while banks managed to leverage their equity by 100:1 and more. It is quite possible a Greek bankruptcy will have a worldwide effect. You can complain about the Feds policies but without their action, we would also be facing even more unemployment and deflation. It is instructive to read economic history, something the Quants and recent financial wizards failed to do. If you listen to the party of NO, you will get a lot of opinion but very little fact. They have an ax to grind, their economic history is one of depressions and unemployment. Look back and see who refused to put money into the economy in 1930, and who wants to do the same thing today. Ask why the banks are spending millions to fight financial reform. Ask where the recent movement of hate, of threats against elected representatives comes from, and if the Republicans are trying to stop it. Who began this labeling of Obama as Socialist, or Nazi, and where do these slurs come from? What is their evidence? What is their definition of such? What does the opposition really want? Take back the country, from whom? Our elected representatives, the 51% of the population that voted for them, from you and me? What government services are they willing to give up? I'll bet it is not their social security and medicare.

    Try reading some of this economic history. A good start is: "the Lords of Finance", "the Ascent of Money", "How Markets Fail", among others, and for the classically in inclined, if you can find it, "Human Action"(L von Mises).

  48. Now I see why Greece isn't in the news anymore...booorringgg

  49. It's so easy. All you have to do is reduce--in some cases drastically reduce--government spending. Sure, people who are getting the goodies now will howl if you threaten to take them away. But it's better than the alternative. And this November, when so many incumbents are slated to be defeated, is the perfect time to elect candidates who have track records of opposition to excessive public spending.

  50. Sigh.....all these posters who immediately assume that the debt will shrink through "inflation" when (or if) the economy recovers so that further stimulus and social safety net spending is not necessary.

    They don't even understand the concept.

    (1) When the economy struggles back to a sustainable level, people and businesses will make more money.

    (2) When incomes of either type increase, taxes that come in increase.

    (3) With more money coming in, the one-time debt of kicking the economy back in gear can then be paid down.

    That is NOT a plan to "create inflation."

    (4) GO read "The Great Depression: A Diary." It was a contemporaneously kept diary written by a REPPUBLICAN lawyer who was 35 years old in 1929. The diary starts in 1930 and ends in 1941.

    And guess what the he and others of his political persuasiion were all obsessively worrying about?

    That all the Federal spending would cause inflation and that the dollar would devaluate because the Federal Reserve was pouring money into banks to prop them up or reopen them if they had failed.

    Honestly, can't these people even begin to come up with soomething new???!!! Talk about a paucity of imagination!

    (5) The historical inflation rate for the past 100 years has been 5%. Get use to it. There is ALWAYS inflation if for no other reason that you have an increasing population all attempting to purchase a finite supply of goods be it houses, food or cars.

  51. You ask Prof. Krugman anything, the answer is always spending first then inflating it later, even when the problem appears to be caused by reckless spending at the first place. The logic goes like this: don't worry about spending wrecklessly, if you can later inflate more wrecklessly. Now I haven't got a PhD in economics, but I won't give that kind of advice to my children if I hope for them to achieve finiancial independence, let along well being. While I don't belong to any political party, I am truely bothered by Democrats' elitism. Can we not just live by common sense?

  52. A game of Greek-German chicken. Look for Saint Sarkozy to swoop down from heaven on a chariot of gold to save the Euro at the last second. The Germans hate the idea of Greeks sunning themselves on Aegean beaches on their dime, but they like charging Americans 30 cents on the dollar to buy their cars more.

  53. Though fiscal irresponsibility and excessive borrowing could be viewed as the prime cause of the Greek debt crisis, which is applicable to other countries too with a fragile economic base; however, with a prudent fiscal and monetary policy mix that involves fiscal stimulus to create domestic demand and employment conditions, and closely monitored monetary stance, not only the growth momentum of economy could be maintained, but the problems of excessive deficit and inflation could also be overcome, as is being done by the US following the economic downturn. There's thus a strong case for the US to continue with the current economic and fiscal policy regime until the signs of sustainable economic recovery are visible.

  54. Mr. Krugman,

    The following passage confuses me: "Greece could alleviate some of its problems by leaving the euro, and devaluing. But it’s hard to see how Greece could do that without triggering a catastrophic run on its banking system."

    You begin this thought arguing that Greece "could solve its problems" by leaving the euro. But by leaving the euro Greece would invite a "catastrophic" run on its banking system. A catastrophic run on the banking system seems like a very severe problem, so Greece isn't solving any problems at all by leaving the euro. So, I'm confused regarding what seems to be an important point in your piece here. Generally I like your articles but I think it's reasonable to expect better writing in an op-Ed piece -- writing that helps readers avoid confusion and clarifies complicated situations.

  55. Paul Krugman:
    "What worries me most about the U.S. situation right now is the rising clamor from inflation hawks, who want the Fed to raise rates (and the federal government to pull back from stimulus) even though employment has barely started to recover. If they get their way, they’ll perpetuate mass unemployment."

    Yes, because in the late 70-s unemployment was contained when the US last tried the “not excessively low inflation” formula.
    By the way what happens to the interests rates on our public debt (which like the Greek one has to rolled and refinanced constantly) when investors start to expect “not excessively low inflation”? What about the rest of the economy (which too would stumble if interest rates jump).

    Paul Krugman:
    "So how did the U.S. government manage to pay off its wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade. The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956."

    The trick was to sell the war bonds in the period 1941-45 at prices that yielded 2.5% interest rate while the government then engineered 4% annual inflation rate. So the suckers who bought them had an annual loss of 1.5% on their investment. The public was gullible. They could never imagine inflation would reach such levels in America. If people read Paul Krugman’s NYT columns and then see the government following his advice or see what is happening around the world (for example in Greece) how likely is that they would be suckered into buying US government paper high?

    I suppose we can start issuing long term bonds “for Liberals only” that they would agree to buy high (yield 1% tops) to help build their utopia on earth while other Liberals engineer 10% inflation by forcing the Fed to print money. I am all for that. Do we have a deal?

  56. Mr Krugman chose the wrong analogy. A better one would have been Argentina 2001.

    For the entire 1990s Argentina had a fixed exchange rate against the dollar. It was called "convertibility": 1 peso = 1 dollar.

    But the 1990s were a period of rapid growth in the United States. Argentina's productivity couldn't keep pace. In order to sustain the convertibility, Argentina needed lots of dollars, i.e. debt (like Greece).

    By 1999 it was clear Argentina's debt was beyond control (like Greece). Default was in the horizon (like Greece). Which made debt increasingly more expensive (like Greece). Private investors fled Argentina (as in Greece). And the only entity willing to lend money to Argentina was the International Monetary Fund (guess what...).

    So, the IMF kept lending Argentina loads of dollars in order to help avoid default. Everybody in the world knew default was impossible to avoid, but the IMF kept lending.

    Until it all blew up. One day in 2001 Argentina announced it couldn't pay its debt anymore (default). Investors suffered massive losses. The Argentinian economy collapsed anyway. And they had to abandon their beloved "convertibility" anyway.

    So, what's the lesson?

    It's just a matter of time for Greece's default. Better sooner than later. The longer you wait, the larger the losses for private investors, the larger the debt for Greece; and the greater the suffering for the people.

    And Greece will have to abandon the Euro anyway. Better sooner than later.

  57. Interesting column but I'm not quite sold. It seems to me the issue is more than just about inflation vs deflation. Its healthy and non healthy inflation vs healthy and non healthy deflation. I don't see why we can't have a healthy sustained deflation rate of about 1%. In fact I don't see how else we can't solve our long term problems without doing that.

    Healthy deflation can happen if its in the context of people having trust in the banking system and the economic system overall, cutting the massive amounts of waste that both progressives and conservatives agree exists, and having free trade but without rewarding big businesses using trade as an extortionate lever playing communities off each other. In that environment I would think you can achieve the best of all worlds. High productivity, full employment, greater tax revenue and a balanced budget.

    Dr Krugman obviously supports healthy inflation where we use fiscal discipline. But inflating the economy would seem to exasperate the wage gap between American workers and the rest of the world outside of Europe. At the end of the day the hundreds of millions of laborers around the world who are happy to do work far below the minimum wage in America is like a big deflationary gravity well. Moreover its generally a positive thing to have such a productive capacity that didn't exist several decades ago. Why fight it by artificially inflating the economy?

  58. I agree with Krugman's points except the last commend about the "tight money people". Make no mistake, these are not actual fiscal conservatives or shouting at the top of their lungs because they care about our nation. These are greedy, dishonest politicians who are saying and doing anything to disagree with the Administration. They are also being selfish by being the spokespersons of the big banks and unscrupulous Wall Street trading houses. Will the public wake up and see the truth or become their lemmings? We should be able to find out soon. Thanks for your columns, Krugman.

  59. As you have made the comparison of the high debt of the United States just after WW II, you need to acknowledge the fact that the US was undoubtedly going to pay that debt as it was the only nation with a standing infrastructure. Before one can reach an opinion about Greece, they should get out a map and take a good long look at this country. What will be seen is a country with great potential; hundreds of islands dotting the Mediterranean; a warm sunny climate; and on top of that, there is a rich history that gives many a desire to go there.

    This potential needs to be unlocked, but it cannot be done when the average Greek knows he can better his situation not by entrepreneurship, but by becoming a public servant. Deflation is exactly what Greece needs along with a change in government rules and regulations to bring in the investment.

    What would your advice be for Detroit or Vegas? Should the US government support these cities by buying municipal bonds or should we let the prices of houses fall to $10,000 so that investors will flock there?

  60. Dear Professor,

    In discussing the plight of Greece why not consider the option of Sovreign default? I would like your opinion on the same, say a la Argentina in 2002.
    I understand that it should not be the first option, but definitely when considering wasting a generation with stagnant/negative growth, is it not better to have shorter painful period during which economy is re-aligned (definitely outside of Euro) but is productive and growing in medium to long term?
    This also seems economically justifiable as all the Greek bondholders have demanded a premium of 3% or so over and above German bonds because GreeK bonds were considered risky; now since those risks have materialized they need to bear a cost of those risks. It appears slightly strange to me with rudimentary economic grounding that bondholders expect to be paid always but wish to have a risk premium; if there is a premium then it must be justified by historical rate of return (including default), is not this a case or am I missing something obvious?


  61. Oh yeah, I'm sure everything will be hunky dory if we continue the accelerating Obama deficits as long as we inflate enough! Wow Krugman, what a GREAT plan. Impoverish the bond holders (read retired people) and those unable to adjust to inflation ( read the poor). Like most liberal prescriptions this one will in the end hurt the most those it is supposedly going to help.
    Spendthrift politicians being urged onward by progressive pundits, a sure fire way to ruin the country. Sheesh!!

  62. Inflation targeting has to be put in the 4% range, not 2%. 2% is too close to deflation (no weapons against the later). The great interest of moderate inflation is that it adds a competitive edge to the really valuable jobs and produces: as consumers see prices of their habits go up, they question them more than if their prices were stagnant, and are more open to the new, and more performing.

    Thus 4% inflation favor technological progress. This being said, 500 professions retire at 50 in Greece, and only 6 taxpayers declare more than one million euros in income. Moreover, the zero interest rate policy has stuffed the country with money on demand.

    Solution: raise interest rates (helping savers), while (the state will keep on) providing liquidity as needed, but going first to the important sectors of the economy. And crack down of the free riders.

    BTW: the Greeks owed money first to French banks (not German banks, the amount owed to Germany being only half). I explained on my site the higher dimensions of the crisis, which is artificially propped up by France, Germany and their satellites... to fight the USA's competitive devaluation. http://patriceayme.wordpress.com...


  63. What is this?! I thought you people were supposed to research something before you wrote an article.

  64. People like Krugman are one of the strongest arguments for investing in hard assets and commodities. Gold and Oil will be your only refuge if Paul gets his way.

  65. Break up Goldman Sachs. Prohibit the type of financial instruments they sold to Greece to help them hide their debt problems, bring ALL derivatives under strict oversight and regulatory control, kill, once and for all, the credit default swaps market, and you will go a long way to preventing the kind of problems Greece is facing from happening to any other country. Derivatives caused massive problems in Mexico, Argentina, Russia, all of Asia, the United States, just to name a few.
    THIS DESTRUCTIVE GAME MUST END. That's the object lesson of Greece.

  66. The Germans have done a good job in stabilising their unified country, while recognising the limits to growth and the demands of their own population's demographic structure. The Greeks did not face the first challenge and had no concept about how to deal with the other two challenges, and others.
    To me the responsible European countries are rightly reluctant to set a precedent of bailing out the least responsible ones. The concepts of "moral hazard" and not "too big to fail" can be extended to countries just as well as organisations. Non-PIIGS do not have the resources to bail out the countries which had a good nosh using the Euro-trough.

  67. People borrowed heavily to buy houses at inflated prices because they believed that inflation would make them a bargain in the end. A house that sold for $20,000 in 1960 sold for more than ten times that amount before the crash. Overpaying for a house seemed like a rational decision and a good hedge against inflation in the future. Borrow dear, but pay back cheap. History showed that this was a smart way to go.
    Inflationary expectations are poisonous. People think that when they get a raise or their portfolio goes up, they are better off, but that is a lie. They have no way to gauge what they will need to survive in retirement and so they take on excessive risk chasing a moving target.
    A trasuries may leave you high and dry when their value is eroded away by inflation. With inflation there is no solid footing, no way to know how to prepare for the future.
    My mother was 99. My mother-in-law is 100. At 71 I am at a loss to know how I will survive in an inflationary world. I can remember when an icecream cone cost a nickel. Please don't suggest that inflation is a solution. It is a lie full of false promise. It is always a form of robbery.
    Instead, bring back a progressive income tax with a steep increase at the high end. Put the military industrial complex on notice and cut military spending drasticly. Get real about reining in healthcare costs. Put finance on notice that there will be no more rescues and put it on a tight leash. All money generated should go to create infrastucture and to put our economy on a new path to jobs and prosperity. We have thrown away our resources on wars and a bloated bloodsucking financial monster. We need to work toward a budgetary system that evaluates, compares costs and benefits, and makes choices. Now we need jobs but we need to move toward a sane balance between income and spending. As long as we take the low road of printing money instead of facing our tough choices we dig ouselves ever deeper into a hole and few in the nation can sleep well at night.

  68. Greece is just living beyond it's means and needs to cut general living standards by around a fifth. Their debt cannot be serviced. The creditors or their governments must take a haircut. This is a not a big problem. It is very important that people do not treat it as a new Lehman. Even after a huge cut in livng standards the average greek will be better off than he was ten years ago.

  69. Greece is in the tank, and Paul is right to turn the focus on what we in the USA have to learn from it. But, again, I am perlexed, left bereft by his admonitions to "return to vigorous growth." Is there anything, anything at all being done by the President and/or Congress to really get the USA back on a short term or long term path to growth? Like building a national electric railroad, or restructuring our educational system to turn out productive technicians of real-world tools of economic growth instead of MBAs with their myriads of financial "products" that helped put us on our own road to Greece-dom? Please get real, Paul.

  70. One problem that keeps being neglected is the corporate irresponsibility. When corporations could fail and when corporations were, by and large, liable to the U.S. laws, their responsibility was system-based. Now, they can easily get themselves extra-territorial. These days companies can easily move their headquarters out to Dubai or elsewhere or transfer funds between many different and varied territories in order to escape responsibility. They have become the modern form of pirates. And the ease with which they can move massive funds across borders certainly facilitates their maneuvering. Individuals, on the other hand, are bound by many regulations and to single territory. This imbalance between 'real' and 'legal' entities cause frictions whose parameters have yet to be fully understood. Their effects are nevertheless felt especially after the recent Wall Street fiasco.

  71. This goes to show that the European Union and the Euro currency are bad ideas. Every country that had the courage to hold a public referendum on whether to adopt the Euro as its currency rejected it. For the rest it was either railroaded through undemocratically or sold as an easy ticket to prosperity. Once again, Switzerland is an island of sanity in a sea of madness.

  72. Mark Paxton, post #26, says it all.

  73. ...indeed, surely slogging thru the Greek crisis has been made better for some, if there be thanks for this Krugman analysis and related reader comments, tho such offers no guarantees that most notable "think tankers" will have done any better as a result if such also be charged with making truly "decent progress" in accountable circles where progress seems wanting.

  74. What this article misses is the comparative expectations of the present-day holder of Greek debt vs. the post-WW2 holder of American debt. American debt was the result of massive spending during a short-term crisis, WW2. As soon as the war was over, it was clear to debt holders that spending would return to much lower levels.

    That can't be said of Greece today. Greece's debt is the result of long-term spending commitments. Greece's deficit is not the result of a short-term crisis, but long-term fiscal irresponsibility that shows no signs of going away anytime soon. Indeed, the Greeks went to the streets to protest fiscal responsibility.

    Is it reasonable to say that the extra spending in the new health care bill is more like the short-term spending in WW2 than it is like the long-term spending of Greece?

  75. "So the only way Greece could tame its debt problem would be with savage spending cuts and tax increases, measures that would themselves worsen the unemployment rate."

    Thank you for finally (and probably accidentally) admitting a link between taxes and employment.

  76. Dr. Krugman,

    Nobody kidnapped the Greek PM in 2000 and put a gun to his head to force his country to join the EMU.

    As well, the reason why the US debt/GDP wasn't scaring anyone after WWII was because of America's investment in productivity and its manufacturing base. Now, the crack cocaine of debt-fuelled consumption is used as a proxy for prosperity.

    The theory is every dollar of "good debt" allows GDP to grow by a multiple of that dollar. That relationship was evident in the 1950s and 1960s as debt was incurred to improve productive capacity. The US is now in a situation where every extra dollar of debt actually DECREASES GDP... America will soon hit the debt wall.

  77. Greece represents only 2 % of the Eurozone's GDP. Germany is leading the attempt to make an honest nation out of Greece which has been fiddling its accounts, with the help of Goldman Sachs, for years.

    There is zero danger to the Euro. Mr. Krugman would be better advised to focus on the far larger problem of potential default among a dozen U.S. States, with a potential default by California far more significant than the potential for disaster caused by tiny Greece.

    I wonder why Krugman invariably focuses his negativism on Europe when there are far larger problems at home ...

  78. "if we eventually return to vigorous growth and moderate inflation"

    Moderate growth and vigorous inflation would work too, and seem more likely in the current environment.

  79. If a bank run takes place in Greece, it will quickly repeat itself in Spain and Italy and even the UK... We will be next. Or first, courtesy of our boys on Wall Street, whose behinds we just saved so nicely.

    And then depression economics will take firm hold (politics is depressing for a long time already.) The collapse of the Soviet economy will look so familiar to those who remember it...

  80. So, Mr. Krugman seems to think that Germany should pay for Greece. Well, if he really thinks that owning Greece bonds is a good idea, he could help them out and just buy some with his own money. It won't be much, but it'll be a start. Since he is complaining about the high interest rates, he seems to think those are too high, therefore Greece debt is an awesome deal from his point of view.

    But lets put polemic stuff aside for a minute. There is a big reason why even without the euro, Greece could not inflate away its debt. Inflation only works this way if it is unexpected - otherwise interest rates just rise to meet the inflation. Therefore, in order to inflate away your debt, most of your debt needs to be long-term, e.g. around 10 years or more. Then the interest rates are locked in and if inflation rises, your real interest rates decrease. Problem solved.

    Only issue is that Greece's debt isn't mainly long term. A big part of the problem they are having is that they have to refinance a lot of old debt, not just take on new one. So inflation would not help, as before long, they have to refinance the majority of their debt. And if they held their debt in long-term bonds, they most likely wouldn't be in the trouble they are in now. Anyway, investors already caught on to this. Greece tried to sell a 20 year bond and failed miserably.

    Besides, it is funny how everybody always says that we need to save in the long run, but not now (here now according to Mr. Krugman b/c we need stiumulus). Of course, next year we will find some other reason why we should not save now but later. You'd think someone like Mr. Krugman who is very knwoledgeable would know this. Even the plans Obama has now don't look good. The CBO predicts that deficits will never fall below 4% in the next 10 years. Is that what long-term saving looks like?

  81. Let's see now, what would cause prices to go down in this country? Most Americans are so far removed from what the Great Depression was like that they can't see much harm in prices going down. Nor do they really understand the mechanism by which such a phenomenon could occur. Most Americans worry a great deal about inflation, some even conjuring up images of Weimar Germans rolling wheelbarrows full of Marks to buy a loaf of bread. Most Americans are blind to the "benefits" that inflation can bring. Most Americans wish they could buy lots of gold as a hedge against inflation. (For instruction, many of us might consider the impact on our net wealth of the decline in the value of our homes--a rather obvious instance of deflation.) Yet, unemployment stubbornly lingers, and rather than putting more Americans to work, strapped state governments lay off teachers and other workers, thus further diminishing the aggregate number of robust consumers. Declining sales taxes are one indication that consumers are tightening their belts, and, for a change, saving some cash rather than spending it. In supply and demand terms, even taking into consideration periodic upturns because of inventory depletion of certain goods, the net effect is downward pressure on prices. Lower prices mean less profits, less taxes collected, more businesses closing down, and the dread downward spiral of a market economy dependent on the citizenry spending with relative abandon becomes a frightening reality. In fact, apart from an almost eerily robust stock market that sits on the edge of its seat waiting for a bump from some technological innovation like the i-pad, most of the signs in the real world indicate that the V-shaped recovery we are all waiting for may not occur for a long time. In fact, if the warnings of Paul Krugman and other like-minded economists go unheeded, a deeper V may be lurking in the near future.

  82. It's a precarious assumption, that a modest inflation will always trigger a industrial growth. You should always also mention 'Weimar', why didn't the inflation help Germany to recover after WW 1 ?
    US after WW 2 could rely on a big an long boom phase, but this is not the situation at the moment.
    Inflation is just a leverage effect, it's ok in a constant industrial expansion, but it's poison when your industry is declining (or non-existing).

    And concerning Greece, it's not fair to blame Germany for private investors having no faith in the financial sanity of the greeks. It's the primary task of the greeks themself to prove, that they are worthy of more loans, but they go on strike and keep doodling along in red ink.
    Latvia is in a much dire situation, and has no problem in refinancing themself - Latvia should be the role-model for all countries, not the United States 50 years ago.

  83. Is it really that difficult to comprehend why people of one nation don't want to pay the debts and troubles of people of another nation?

    Let me try out an analogy. Mr Krugman! Mr Krugman! You're a famous economist, a professor, and a writer for the NYT. You've got more money, probably, than I do and I'm in debt. C'mon, were all in this together. Send me a check!

    Somehow, I don't think I should be holding my breath. Nothing against you, Mr. Krugman, I was just using your name to illustrate a general point about why its very economically dangerous to enter into such "socia--BLE!" agreements. Germany is, wisely, not staying aboard to try and balance the ship. Germany is, wisely, taking first steps to abandoning the Titanic.

  84. I live in Germany. The question is if Germany bails out Greece, then they will soon be bailing out other troubled economies such as Italy, Spain, etc. A Greek rescue is about as popular among Germans as the AIG, CitiBank, etc. rescues are in the US. What would be the US position if the the US had to raise taxes and go deeper into debt in order to bail out Mexico after a spending binge? It's easy for Americans to tell Germany to pay up. Maybe the US tax payers should rescue Greece instead?

    Mrs. Merkel and her party need to win elections in here Germany, not Greece or in Brussels in order to remain in power. Telling German voters that their tax monies are going south so Greeks can continue to retire with full benefits at age 52 while the retirement age is being raised in Germany to 67 doesn't sit well here. Furthermore wages in Germany have declined over the last 10 years while prices have increased, so most workers are very skeptical of the benefits of the Euro.

    Greece got themselves into this mess, bhe powerful money men will find a way to rescue the Greek elite at the expense of German workers and on the backs of the Greek people. At the same time, they will make a tidy profit in the transaction. The question I ask is if Germany bails out Greece, Italy, Spain, etc. who will bail out Germany when the bill comes due? Certainly not Greece.

    Brian Moore

  85. The other day I tried to pay for a cup of coffee in Hamburg with a Greek 2 euro coin, and they wouldn't take it! You don't believe me, Paul, do you? Good, because it's not true.
    Greece isn't stuck with someone else's currency. The Greeks are stuck with their own currency, every last note of which is proudly printed with the word EYP?. They were dying (and lying) to get into the euro, and now they're going to have to live with the consequences of their hubris, e.g. having to pay taxes like the rest of us stiffs. It would help the Greek economy enormously if they would shut up about the war, of course: otherwise they risk wrecking their vital tourist trade.
    Germany's stance belies a hidden agenda: the recent slide in the value of the euro has given the country's exporters a huge boost. Incidentally, it also makes Greece considerably more affordable as a vacation destination for Americans. If you really want to help, spend a couple of weeks this summer in Crete. I'm sure it would do you a world of good, and later you can write about your impressions of a country a terminal denial and delirium, dancing away the night in village squares.

  86. Paul: We need OVERSIGHT! Paul! Free Market Economy still works!

  87. Chancellor Merkel is desperately trying to stall this process until the very importand North-Rhein-Westfalia state-elections on May 9th. After that she will dish out the german taxpayers money like candy!

  88. I would like to hear more about how much of our 'growth' in the last 25 years was fictitious - that is, was in the financial sector. And the military.

    Has the US really been stagnating? Without lying bankers and their fictitious profits, has there been any growth? Professor K should be able to give a better estimate than most people.

    As for changing things, as long as Washington remains a giant bribery bazaar, not much chance. Watch the AOE1776 pieces on YouTube.

    If you want to actually improve things, don't vote for anyone who voted for the Iraq war and the bank bailout. They are owned by the military and the banks and will take your money and hand it over to their masters yet again.

    Anyone visiting San Francisco is invited for coffee and Axis of Evil production.



  89. So you are implying that 40 percent inflation over 10 years is moderate? I think that maybe you should asked the retired person that has to live on a fixed income if 40% is moderate!

    Like double entry accounting there are two sides to this ledger. Sure, inflation would help both our public and private debt situation. But inflation is also theft. It steals from savers.

    And while deflation would be very, very painful for many, including our government, it would benefit savers, and also benefit the US long term by allowing it to be more competitive on a world-wide bases through lower prices.

    On another topic -- the stimulus. Please note that NJ received slightly over 3 billion dollars from the stimulus last year that went to education. It kept teachers in the classroom. Well, guess what? This budget year there is no stimulus. The 3 billion has gone away. Our district will probably lose over 50% of its state funding, and we are going to be laying off teachers!

    I guess that 3 billion dollars of additional federal debt call "stimulus" created a lot of jobs - at least for one year.

    Folks, we are just trying to keep this party going, without taking the really tough actions that we need to take.

  90. Inflation erodes the purchasing power of a currency. People lend to a government 10 apples with the expectation of receiving 11 apples down the road. Krugman is basically saying that the answer is to instead repay 7 or 8 apples instead. There's no arguing that this would reduce our existing debt burden. While modest inflation is fine, Krugman is implicitly arguing for significantly higher levels of inflation. Basically, he wants to finance big government spending by breaking past promises to savers and penalizing them for lending to our government. This strikes me as wrong morally and also shortsighted as it will potentially make it far more expensive to borrow going forward.

  91. Professor

    The proper comparison would be the individual States, who like Greece do not have the capacity to print money. The Greeks borrowing costs are now in excess of 7% and will probably climb higher. How long before California and NY are at these same rates.
    As to inflating our way out of our current debt situation. Unlike post WW II America, this strategy is limited, you cannot inflate your way out of debt when many of the Bonds you sell, such as TIPS, are adjusted for inflation and the price of other Bonds is determined by the expected inflationary rate.
    The one comparison that makes sense is Post WW II to present day America. As other readers have pointed out after WW II we had the manufacturing capacity to rebuild Europe. Today it is America that needs rebuilding, unfortunately as recent events have demonstrated the primary beneficiary of American rebuilding efforts will be the Chinese (California High Speed Rail).
    Finally, one reader posted we need a Balanced Budget Amendment and his post had a number of "recommends." First, the last time America was debt-free Andrew Jackson was President, and more important how would they propose this would work? The government would have two options, one either raise taxes to cover the shortfall or two stop paying Social Security and Medicare among many other social programs.

  92. "thanks to German obduracy"
    Yeah, once again you pick on us Germans, Mr. Krugman. And no mention of the IRRESPONSIBLE behaviour of a strong minority of the Greeks, who are killing billions of Euros of desperately needed GDP with their illegal blockades and strikes every day. No mention of the inability of the Papandreu government to implement reforms that would tax the rich, help the poor and the middle class and thus bolster the domestic market. No mention of the inherent problem in rewarding instead if punishing those who acted irresponsible and even defrauded their EU partners (what kind of incentive is THAT?). No mention of the role of US investment banks in increasing the crisis for their own profits. No mention of ANY other offender, obviously it's only Germany responsible for the dire situation of Greece! And everybody seems to believe that the ONLY way to end the Greek crisis is the Germans bailing their well meaning but ineffective administration out, without any terms attached to the credits.

    For heaven's sake, would you PLS acknoledge that we AREN'T everybody's rich uncle? Germany HASN'T the highest GDP/capita in the EU, we HAVEN'T the best social net anymore, our people HAD to cope with harsh reforms in the last decades (and did so WITHOUT revolting), and last but not least just some years ago the PIGS ridiculed us for our alleged underaverage growth rate. WHY should WE bail out those bubble economy nations now, when there is no sign that THOSE governments and THOSE people have really adjusted to the harsh realities???

  93. The problem is a hard currency. That's what you're saying. You can have a hard currency, or you can have a welfare state. But you can't have both. Choose.

  94. Inflation is just a more sophisticated way of the government to rob its citizens and creditors. I find it hard to believe that this is supposed to be an acceptable solution for the problems caused by a country's debt-fueled consumption excesses. Of course, it would be very convenient for the governments of Europe and the US to just inflate their problems away, but surely totally anti-social and unfair. (I presume these are concepts that you can not easily put in an ivory tower economic modell, but that doesn't mean they don't exist or don't matter!)

  95. When you give up your sovereignty and start using a fake money this is what happens. Greeks should immediately get out of the EU and Euro and start printing its own money. Otherwise they'll be serving for their new German Bosses forever.

  96. "How popular would a bailout of say Mexico (upon real or perceived lack of discipline) be with American taxpayers?"
    Good point, #29. But you don't have to look across the border. Where is the huge enthusiasm among people in the other 49 states to bail out California???

  97. Paul, I thought you and your Liberal friends said that Obamacare was awesome with respect to cost control - at least that's what you said every Sunday morning when you were doing the news circuit. And yet, down about paragraph 12, you seem to imply that healthcare costs are still a problem.

    If so, what did this trillion dollar boondoggle that just passed buy us? I'm just askin', cause to pass it, you sorta had to imply some form of cost control - where is it?

  98. Since Krugman and Bernanke hail from the same university background, this sounds like a Nobel price certified admission that the current Fed policy is to inflate away public and private debt. This might sound like a free lunch for the debtors, until creditors will start charging interest rates that reflect that risk. Looking at where 10 year Treasuries stand today, they have already started. So maybe the next step is outright default - which students of the Great Depression know it wouldn't be the first time.

  99. Rigoletto writes

    "To get money it is not sufficient to order the courts to open some cases against international companies doing business in the USA and milk them for billions. One day (hopefully soon) the same will take place the other way around too.Does the mugging"

    Firstly, the U.S. has not been cooking the books with regards to it's economic statistics as has Greece. So the loss of confidence is a false comparison.

    Secondly, the only European companies the Treasury has gone after are the swiss banks who hide money on behalf of tax cheats. We also have laws against money laundering and prosecute them too. Swiss banking has many strengths and a global reputation, but the "tax avoidance" component is a dark corner it does not need. And German as well as French tax authorities are even more aggressive than the treasury, at targeting swiss banks. As to U.S. technology companies, such as Intel, Microsoft and soon of course Google, who deliver innovative new products to European citizens, at ever cheaper prices, being prosecuted and fined by the EU, when numerous state sanctioned monopolies gouge European consumers, is classic example of delusional thinking.

  100. Yonkers, New York
    09 April 2010

    Dr. Paul Krugman clearly raises the red flag about what could happen here if U.S. policymakers ignore what the clear lesson of Greece provides.

    What the U.S. urgently has to do now is to give a further boost to the U.S. economy which is obviously not out of the woods yet. Some 15 million Americans are still without jobs, and that's not counting the many who are in parttime jobs. Many states are in financial distress, and are compelled to lay off employees as well as cut down on capital outlays so that they are able to bring outgo and revenues into statutory balance.

    Here is a clear case for a Stimulus II package, probably in the order of $1 trillion, specifically to be used to create jobs nationwide in repairing and maintaining the U.S.'s crumbling infrastructure and to give long-term loans at a concessinary rate of interest to state governments which are now in financial straits.

    As Dr. Krugman clearly points out, when the U.S. economy returns to health and vigor--and it surely well--national debt will go down as a percentage of GDP. It has happened before, and it will happen again.

    Mariano Patalinjug

  101. Dr. Paul,

    —your key point, that the politics of deficit reduction will end up leading to greater deficits is, as always, well taken, but I don't get how you can call for a return to "vigorous growth" with a straight face. If we're not at the end of that road, we're close to it.

  102. There's one noteworthy sentence here. The leading "debt doesn't matter" columnist has just said. "Yes, Greece is paying the price for past fiscal irresponsibility." Everything else is hemming and hawing, trying to qualify a reluctant concession to reality.

  103. Paul, Unemployment in the United States is now decoupled from investment, i.e., because so much of new job creation occurs overseas, even if the profits are counted in the United States, we are stuck with massive unemployment. Making all this much worse is our astonishing growth in population. Few Americans realize we just turned 309 million and that we are on track to increase by more than a third, over 110 million, in the next 40 years! Nobody, of any political stripe talks about that, of course.

  104. Thank you Prof Krugman for showing us such a cautionary tale of the deflationary spiral. In addition to monetary policy though, another possible lesson is stubborness and rigidity as human nature --- and the resultant danger. The German was stubborn even though Greece can be the first domino of the fall of the Euro dream. So was the ordinary Greek citizenry. The government wanted to impose austerity measures and they protested. The funny thing though is that they are not unlike the tax cut folks of this country. They want everything when the time is good but protest loudly and refuse to give back when the time is not. Maybe intransigence is hardwired in some people. I am thankful that the current crop of US leaders like Fed Chairman and the President are coming out another American DNA branch: they are pragmatists. I am hopeful their thoughtful policies of the middle path will get us out of this mess but it will be easier to the extreme right to abandon their destructive politics for the sake of the country

  105. #4 and # 10 are correct; Mr. Krugman is comparing apples and oranges and failing to mention that the US economy has changed dramatically since 1950 to the point that "vigorous growth" (as it happened in the 50's and 60's) is not possible due to the deep changes in our economic infrastructure. His article is misleading at best, if not downright dishonest.

  106. Dear Mr. Krugman,

    40% inflation in the decade after the war means, in other words, peoble lost 40% of their savings. Well, if you want to propose this as an acceptable solution, then be clear about it. Say it straight away, that you claim nearly half of everybody's savings within the next 10 years to pay for national dept. The treasury will be fine then. You could call it Emergency Tax. I'd rather call it robbery. Because that's what inflation really is.

  107. It's not what America can learn from Greece, it's what Greece can learn from America, where we rack up the debt but never pay it back.

    Solution 1: Greece needs to declare bankruptcy, change their name to New Greece during the restructuring period, and emerge as a fresh, debt-free CorpoCountry;

    Solution 2: The uber-greedy could actually lend Greece the money they need at rates they can afford if they wanted to. My friend is in trouble, he needs a float - I don't offer him help at 'market interest rates.' I offer him help at no interest rates... you know, like the way We The People 'helped' Big Bankster with trillions in 'loans' at 0% interest?

    If American Big Banksters screwed Israel into the poor house, do ya think we'd then just sit back and watch em tumble because they couldn't afford the present bond interest rates?

  108. Somebody sounds a little self-conscious about their advocacy for a health care program that will add 1/2 trillion to the public debt in coming 10 years, as per article in NYT.

  109. Greece doesn't matter, it represents about 1% of the worlds economy. Most importantly the USA is not their biggest lendor, Germany is. And Germany will get their money (i.e. how about selling some islands to China? how about changing the retirement age, etc.). Once the other PIGS see what Germany, and other EU lendors are going to force Greece to do, they may make the needed reforms to get their budgets order. If they don't, they will get brutalized like Greece is going to.

  110. A good part of Greece's problems stem from the Grreks's very "Tea Party" attitude towards taxes. An average estimate is that about 30% of the economy does not pay their individual and/or corporate taxes...

  111. Greece and the USA essentially have had the same problem- failure to tackle their problems and make the hard decisions for thirty to forty years. Sooner or later it is going to bite you in the ass....

  112. The situation is terrible, indeed. But, it seems, there is not as much sympathy for Greece as one would expect. This is probably due to the fact that the Greek government fudged the process of admission to the euro (they said so, officially, after adopting the currency) and it has been too careless with the finances. One hears of way-too-generous pension plans and other no-nos.
    Looking back, one wonders if they really needed (could afford) the recent Olympic Games extravaganza.
    As far as the German position, what can you say? Germany started the needed social-economic-financial changes a decade ago and it seems to be paying out. I fully understand their irritation with others that did not have the same posture.
    Your comparison of the present Greek situation with that of the US, in 1945, misses one very important aspect: the financial "investment" institutions back then were truly teething babies, when compared with the greedy sharks-in-steroids, that populate today´s financial centers, and their enablers in government. Places like Wall Street and The City come to mind.
    Is the euro the culprit here? Not exactly. It may limit Greece´s options but it also gives the country a protecting net, against the previously mentioned predators.

  113. Here's a prediction: China will buy Greece. It will give China a foothold in a continent it will eventually own right next to the other continent it will own, Africa. As it appears the "experts" will get their way and force a stronger Yuan - magnifying their multitrillion dollar bank account, all while it grows and grows - China will be buying up a good part of the world over the next 20 years. Greece will be the first domino . "The golden rule: He with the gold rules". China has will be reaping the affects of their Hard work, intelligence and discipline .

  114. "hitting a low of 33 percent in 1981. "
    Yes, and then it went back up thanks to Reagan's tax cuts for the wealthy, which made the US a debtor nation while creating some incredibly wealthy people at the expense of the middle class. Even before Reagan the Republicans were claiming that they cared about debt-- but by now you think everyone would have caught on. But really they only complain about debt that comes from investment in America's infrastructure and people (health, education, opportunity).
    Debt that comes from cutting the taxes of the wealthy or no-bid contracts for war profiteers seems fine with Republicans

  115. Looting Main Street
    How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece

  116. NO NONTERRIBLE choices?

    Really, must we? No choices not terrible; nothing but terrifying choices; anything, please!

    Cable news broadcasters, and now you too? Just stumble out any old terms mashed together that express the sense, who cares?

    Language killer!

    The Detective In The Mirror

  117. Greece should look for guidance to the country which crisis most closely resembles Greeece's current woes: Argentina. In 2001, Argentina's external debt had climbed to insurmountable levels fueled by a policy that pegged the dollar to the peso at an unrealistic 1 to 1 ratio, which acted as a powerful magnet for investors out to make a quick buck by arbitraging between the local peso interest rates and the fixed dollar. Instead of defaulting, the government chose the same path that is being suggested to Greece now and implemented a "Zero Deficit" plan, which severely cut the wages of government employees and retirees. The alternative, letting the peso come down to a realisitic level, was disregarded due to ideological blindness. Massive street protests quickly followed and a few months and four presidents later (the first of whom declared Argentina's debt default), a new government did finally permit devaluation and imposed strict controls on short-term capital inflows and outflows. Initially the going was rough. There were indeed runs on the banks, inflation shot to high double digits, and the exchange rate climbed to four pesos to the dollar. But, within a year, inflation had come down to a single digit, the exchange rate had settled at three to one and depositors received partial, but significant, compensation. Most importantly, Argentina resumed growth and, from 2003 through 2007, expanded at an annual average of 8%. In 2005, it offered a bond exchange that was accepted by more than 70% of investors (and in the next few weeks it is expected to reach agreement with the remaining holdouts). Finally, in a significant test of its policies, when the global financial crisis was unleashed in 2008, Argentina was spared the huge rise on onemployment that devastated the weaker Eurozone members (by way of comparison, Argentina's unemployement stands at 9% while Spain is 19%), suffered no bank runs and has began growing again. The lesson, flexibility in managing currency rates and strict flight capital controls are essential economic tools that a sovereign nation should never give up.

  118. Mr. Mellon...

    Paging Mr. Mellon...

  119. Going round and round and round and there are no good answers, across the board, anywhere one looks.

    Perhaps the most viable concept on the table right now is a return to, and embrace of, the biblical idea of the Jubilee.

    Forgive all debts, public and private, completely clean the slate, Tabula Rasa style, across the globe, among all Nations of Earth, and start from scratch.

    Why not?

    All the other alternatives offered have produced the solutions that have brought us to this point, and this one hasn't been tried, yet.

  120. The problem for the USA, which seems to be something that Dr. Krugman won't acknowledge, is the off-shoring of jobs and the enormous military expenditures of the USA. If people are going to have money to spend, they have to have income. If that income is spent within the local (or even national) economy it provides income for others; the others' incomes, similarly spent on goods and services provided in the local economy snowballs into more jobs. Off-shoring of jobs may make the product that is shipped into the USA cheaper to buy, but who can buy without job income? Also, it is a fact that citizens of the USA have too much foreign-made stuff and poor quality of life.

    The only jobs available for many poorer young people have been in the "volunteer" military. They have been bribed to enlist with a signing bonus.

    The cost of the USA Empire, maintained for the benefit of the plutocrats, is enormous and has not been paid for through taxes (the wealthy have claimed that taxes keep them from investing in the economy - Ha!!). Somehow, perhaps by whipping up fear of terrorists, outrageous amounts of money have been approved by the Federal government for war and war materiel. The Pentagon, CIA, etc. have been given a blank check.

    Dr. Krugman, I am old enough to remember conditions after WWII in the USA and I know there was substantial debt, but much of that debt was owed to citizens of the USA, not to foreign creditors. I also remember that there wasn't such a wide spread between the cost of loans and the interest that was paid on savings. Presently, this is way out of whack; many "loans" nowadays are credit card balances with interest rates well above 10% while interest on savings is less than 1%; it seems that banks are stealing much of the difference. I know some simple people of very modest means who live only on meager social security (many less than $700/mo) plus interest from bank CDs. Their CDs are not earning anything more than a few cents. They are not rich enough to have the benefit of being part of hedge funds.

    Off-shoring jobs has been devastating to income into the Social Security system also. Social Security was never set up to be an annuity; it was set up as a social safety net for older people and others unable to work or children whose parent died where part of the income of the people working would be shared. This social contract was balanced by the working people knowing it would be there for them. With off-shoring jobs, corporations have increased there profits but have undercut the social security contract.

    The tax structure and financial regulations need to be returned to post WWII levels. This would solve many of the economic needs of the American people.

  121. Paul K. fails to distinguish the primary differences in the economies post WWII and today. In the 40's and 50's there was little drag on the economy from social programs, America had built a significant manufacturing capacity over the rest of the world and was the primary supply of reconstruction materials and technology to those economies devastated by the war. The same cannot be said for today. The Obama administration has spiraled the nations debt to dizzying heights as it pursues a reckless plan of redistribution - as admitted by Pelosi, Reid and Obama. As opposed to post WWII, there are now ample investment alternatives for capital other than the US economy - and money will seek the highest return.

    Jon Jost has apparently not looked at the budget in some time - more than 50% of spending is made up of "entitlements" and interest. Discretionary spending - which includes military spending - is about a third of all federal spending. So railing against the military-industrial complex is rather anachronistic. The bulk of spending are transfer payments - money taken from one american and given to another.

    Back to back Trillion dollar deficits without productive output are what point to the rapid inflationary environment that is looming. As it pointed out elsewhere, a growth rate of 2-3% cannot plug that budget gap. How many of the "progressives" remember that Pelosi and Reid were voted into power in 2006 NOT based on their social agenda but by campaigning as spending hawks? Or that while Clinton is credited by Progressives as the last President that balanced the budget, it was actually the Republican Congress who changed the spending habits - Clinton's last budget before Republicans were elected into majority had $250 billion deficits as far as the eye could see.

    Or that while the tax cuts were trumpeted as "cuts for the rich" by the left, mathematically that is correct, since the top 10% pays more than 25% of all taxes - while 50% pays none? So of course tax cuts would go to the rich - they are the ones actually paying taxes, and creating jobs and moving the economy along. Or that the old class warfare approach isn't accurate in modern american society - the "rich" class isn't the same group of people year to year like it is in Europe or the Far East. It is made up of people like you and me who have a good idea and the guts to build a company - as opposed to the Political Class who have their family seats in Congress and who imperically rule from their tax supported jet aircraft that they use as their personal perk.

  122. As usual Professor Krugman leaves out a great deal. Some others have pointed out the fallacies in Professor Krugmans thinking.

    Firs the U.S in 1946 and Greece is not comparable. The U.S. was the sole economic superpower to rise from the ashes of WWII. The U.S. was considered the only safe place to invest so servicing the debt was not an issue.

    As Krugman did note the debt after WWII was a one time thing.

    But today that is different with entitlement costs soaring about to add to the deficit our deficit is not likely to come down or not come down in sufficient numbers.

    Why should the Germans bail out the Greeks. The Greeks have lied about their level of debt they have spent irresponsibly. The Germans have made tough decisions to deal with their debt. Increasing retirement age to sixty seven versus fifty for Greece.

    The lesson for the U.S. is that runaway entitlement spending will crush your economy. You don't need to go to Greece to see that. Look at California which now has a 500B unfunded pension system to deal with.

    Greece cant compete because it is inefficient. Soon we will be saying the same about the U.S.

  123. Growth, in an era of natural resource collapse and impending climate disaster, cannot be the way out. Redirected growth, but not absolute growth ala GDP.

  124. Hello,
    The population of Greece is about the same population as Ohio, approximately 11.5 million people. We are looking at a fairly small county. Generally a lot of manufacturing jobs have moved out of Europe and the USA toward Asian countries were labor costs are cheaper. So Greece is a very small economy with not a lot of industry left. Germany's and the Europeans Unions' unwillingness to offer financial aid is seemingly punative and a lesson to other small countries rather than a strategy. Likely the EU will have to come up with a bank or mechanism to handle these situations. Basically it does not benefit the EU to let Greece go bankrupt, and it looks like this just might happen. It's hard not to blame Germany as it is the defacto leader on this matter; although it seems to be a more general systems failure that will need to be revisited in the EU. The risk is that it might not just be Greece as other small EU countries have trouble too.

  125. Paul, do me a favor. Move this to page one, Enlarge the Title and give it at least a 1/2 page spread.

    Every time I read another article about the economy or business in the NY Times, it raises the specter of inflation. The loop is whipping itself into a frenzy and I think dark storm clouds are gathering for the 15 million.

    Umm, flip to page one, Floyd Norris is tepidly giddy about a recovery.