Sunday, May 1, 2011

One of Krugman's talents the ability to dig up or create a simple picture that effectively rebuts a popular but flawed narrative.

For example, take the profligate PIGS story -- the EU is in trouble mainly because four countries (Portugal, Ireland, Greece and Spain) were reckless spendthrifts. It's a widespread explanation. Edward Glaeser even used a Spain specific variant of it to argue against high-speed rail.

In response to this, Krugman shows us the debt levels and deficits of these four countries (plus Germany as a reference point) on the eve of crisis:

As Krugman summarizes:

Yes, Greece had big debts and deficit. Portugal had a significant deficit, but debt no higher than Germany. And Ireland and Spain, which were actually in surplus just before the crisis, appeared to be paragons of fiscal responsibility — the former, said George Osborne, was

a shining example of the art of the possible in long-term economic policymaking.

We know now that the apparent fiscal health of Ireland and Spain rested largely on housing bubbles — but that was by no means the official view at the time. And nothing I’ve seen explains how new fiscal rules would prevent a similar crisis from happening again.

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