In the spirit of Thanksgiving, I am not going to accuse Krugman of all sorts of perfidy. I genuinely want one of his defenders to explain this recent post.
Krugman is arguing that the cases of Ireland and Iceland show that the types of remedies he has been suggesting, work out much better than the remedies suggested by his small-government critics. Here’s an excerpt:
[D]espite epic irresponsibility on the part of its bankers, on a scale that makes Irish bankers look like Jimmy Stewart, at this point Iceland actually looks a bit better than Ireland.
I wrote about the surprising resilience of Iceland a while back. Since then, Ireland has had a bit of growth, while Iceland had a modest setback in the first half of 2010 (partly thanks to the volcano)…
Slightly worse (but within measurement error) GDP performance in Iceland, but substantially less bad employment performance. And don’t get me started on Latvia and Estonia.
Oh, and while the IMF is demanding that Ireland cut minimum wages and reduce unemployment benefits, its mission to Iceland praised the “focus on preserving Iceland’s valued Nordic social welfare model.”
What’s going on here? In a nutshell, Ireland has been orthodox and responsible — guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring — notice that wonderful line from the IMF, above, about how “private sector bankruptcies have led to a marked decline in external debt”. Bankrupting yourself to recovery! Seriously.
And guess what: heterodoxy is working a whole lot better than orthodoxy.
So yes, “What’s going on here?” Is Krugman saying that it was the fuddy-duddy austerians who were saying, “The government needs to assume all debts in the banking sector,” while it was the bold Keynesians who were saying, “Nah, just let the banks fail, and bankruptcy court will handle it”?
Maybe that’s how the chips fell when it came to recommendations for Ireland and Iceland, but that sure as heck wasn’t how things played out in the U.S. No, Krugman & Co. were saying capital injections into the big banks were crucial. Austrian-types were saying, “Let the big banks collapse. That won’t destroy assets, but instead will simply recognize reality. Bankruptcy courts will reallocate the remaining assets into the hands of more responsible institutions.”
I am sure that’s what we were arguing, because at the time Tyler Cowen told us we were being naive and that bankruptcy would take too long–hence the need for TARP.
(P.S. If someone wants to provide links, I’ll update this post. I told my son I “wouldn’t work” today, and this is borderline working, even though I derive much pleasure from criticizing Krugman.)