Jón Dan: F handa Krugman

Jón Daníelsson, hagfræðingur við LSE, fjallar á bloggi sínu um skrif Pauls Krugman um Ísland og segir að Krugman eigi skilið að fá falleinkun fyrir frammistöðuna:

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Paul Krugman writes about what he calls the The Icelandic Post-crisis Miracle. The facts he cites seem to be broadly correct but the analysis leaves something to be desired. How can any sensible analysis of economic crisis reach the following conclusion?

The moral of the story seems to be that if youre going to have a crisis, its better to have a really, really bad one. Otherwise, youll end up taking the advice of people who assure you that even more suffering will cure what ails you.

His article is short on analysis leading to this conclusion, but the following statement seems to be key:

Iceland built up so much debt and found itself in such dire straits that orthodoxy was out of the question. Instead, Iceland devalued its currency massively and imposed capital controls.

Instead of imposing austerity and deflation supposedly Iceland did the opposite. Mr. Krugman please get your facts right.

Iceland did not devalue, the currency fell.

This is not the kind of capital controls that often can be a sensible policy. These capital controls were imposed only to lock in carry traders, and by most accounts are causing considerable damage. For reasons of equality (because of EU and IMF), no distinction is made between inflows and outflows and the impact of the capital controls is to prevent FDI and discourage domestic investment.

Mr. Krugman seems to imply that little austerity has been implemented in Iceland. The government is drastically cutting public services and lowering the salaries of government employees while at the same time imposing what may be the highest taxes in Europe. This is one of the strictest austerity programs around, if not the strictest.

“a handful of operators built up enormous debts that their fellow citizens are now expected to repay.” The first part of this quote is correct, the second part is almost entirely wrong. These operators accumulated debt equaling a large multiple of the annual GDP. There is no way their fellow citizens could pay even a small fraction of his and indeed most of the losses will be written off by foreign creditor banks. The only part of this that may fall on their fellow citizens is Icesave, and the Icelanders have successfully resisted paying that. On the contrary to the quote, I suspect one final analysis is done, the pre-crisis bubble and the subsequent crash will represent a large net transfer from foreign names to Icelandic names.

One reason for why Iceland got onto such a mess is because of inflation targeting, and the Central Bank has not changed its policy. This is as orthodox as one can get.

The stock exchange fell by over 90% wiping out peoples savings. This on top of large losses in money market accounts, and real estate price drop that may exceed 50-70%.

“benefits of the financial bubble went overwhelmingly to a small minority at the top of the income distribution.” Judging by the amount of high end cars, expensive houses, foreign luxury holidays, and the like, I would think most people benefited. The impact of the bubble was to raise salaries across the board, and create a large number of very high paying positions. Indeed in common with other wealthy countries they brought in migrants to do their dirty jobs. The bulk of the money may have gone to the to, but most shared in the loot.

The only grade one could assign to such economic analysis is F.