In this post, Krugman takes Marco Rubio to task for claiming that government deficits crowd out private investment. Amongst his points, Krugman produces the following scatter plot:
…and then comments, “Contractionary policy has proved contractionary.”
Wait a second. Look at that chart. Even on its own terms, it’s not nearly as obvious as Krugman makes it seem–if you take out the bottom two data points, there’s no clear pattern at all.
And what are those bottom two data points? Greece and Ireland. As we all know, the Greek government systematically lied for years about its actual deficit, in order to placate EU authorities and continue to violate their rules about fiscal responsibility. Then when the crisis struck, their bonds got hit–you know, by those “invisible” vigilantes in which Krugman doesn’t believe. So yes, the Greek economy has been performing badly the last few years, but it’s not a slam-dunk case that this is an example of why fiscal prudence is a bad thing.
Yet the other example, Ireland, is even more ridiculous for Krugman to be using in this fashion. I have no idea what it means to say that from 2008-2012 Ireland had a “change in the structural budget balance as a percentage of potential GDP” of almost 6%, but here is what Wikipedia has to say about the expenditures, revenues, and deficits for Ireland from 2007 – 2012:
So with those numbers, you can see it’s a bit much to cite Ireland as an example of a country that eschewed Big Government Keynesian demand stimulus when the crisis struck.
In fact, I can cite a Nobel laureate who agrees with me, that the Irish bailout of its banks was a terrible idea, because it racked up too much debt:
Ireland’s bank bailout had a face commitment around 15 percent as large as the TARP — in an economy 1/100th the size of the United States. The TARP was only 5 percent of GDP; even if a large part of the money (mainly used to purchase bank equity) had been lost — which it wasn’t — it would not have been a big factor in federal debt.
There have been other losses, largely at Fannie and Freddie; but in the end the cost of financial bailouts is not an important factor in US debt and deficits. In Ireland, by contrast, it is what has made a potentially manageable debt situation catastrophic.
I’d add that the big risk in October 2008 — that the whole world financial system would freeze up — was never a concern in the Irish case.
But mainly, putting taxpayers on the hook for 5 percent of GDP is one thing; putting them on the hook for 60 or 70 percent of GDP, something quite different.
At this point, I don’t have to actually tell you which economist I’m here quoting, who was worried about the Irish government’s spending in the crisis leading to a “catastrophic” debt situation, do I?