The Agenda

Anders Åslund’s Critique of Paul Krugman

In recent years, Anders Åslund has been praising the Baltic states for embracing fiscal austerity and structural reform in the post-crisis era. Paul Krugman has argued that the supposed success of the Baltic states is an illusion, and he has instead called for countries to make more use of fiscal stimulus. In Foreign Policy, Åslund makes the case that Krugman is dangerously wrongheaded:


Krugman’s main line of argument has been that more fiscal stimulus is always needed as long as a significant output gap exists. But in Cyprus and Slovenia, very substantial fiscal stimulus generated minimal growth.  Neither country would be suffering from its current financial conundrum had it not followed such a policy. Spain would probably be safe as well.

Krugman’s disregard for the risk of sovereign default is perplexing. His main line of thinking seems to be that Europe has a growth problem, not a debt problem, and he appears to believe that a fiscal stimulus can always overcome the threat of the increased public debt burden. Even in the case of Greece, which had a gross public debt of 165 percent of GDP at the end of 2011, he failed to notice the danger but financial markets declared that the country’s public debt was excessive. Slovenia’s public debt of 50 percent of GDP, for instance, is more than the markets accept, as its bond yields have exceeded 7 percent.

It is difficult to understand how Krugman can ignore the structural reforms that are urgently needed in Europe. All the southern European countries have overregulated labor markets that have caused persistently high unemployment. In Spain, it is easier to get a divorce than to sack a worker — which explains in part why companies are very reluctant to hire new ones. But to Krugman, unemployment is merely a matter of lack of demand: “The urge to declare our unemployment problem “structural” — a supply-side problem of some kind, not solvable by the “simplistic Keynesian” notion of just increasing demand — has been quite something to behold,” he wrote on June 8.

Yet Åslund is careful to acknowledge that the needs of small, open economies which use currency pegs are quite different from big economies like the United States and Japan:

The most generous explanation for Krugman’s Baltic blind spot is that he thinks mostly about big states, and perhaps only about the United States. Small, open economies work quite differently. Tiny countries tend to adopt a foreign currency or peg their exchange rates, as the Baltic countries and Bulgaria have done. They cannot allow themselves large budget deficits, because the markets will not allow them as high levels of public debt as the likes of Japan or the United States. Their bond yields will rise at even moderate debt levels, as Slovenia, Cyprus and Spain have discovered. Another way to look at it is that even when Krugman writes about European economic policy, he is actually only making arguments for what he believes the United States should do.

This would be in keeping with Krugman’s general approach as a public intellectual.


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