Alan Reynolds | Confirmed: Paul Krugman is still full of it

Economist Jim O’Neill coined the acronym BRIC in 2001 to refer to four  economies which showed great potential then and now — Brazil, Russia, India and  China. More recently, he added four more promising MIST economies — Mexico,  Indonesia, South Korea and Turkey.

In mid-2008, The Economist magazine drew a sharp contrast between the booming  BRIC economies and four feeble PIGS — Portugal, Italy, Greece and Spain. By  2010, after Ireland and Great Britain bailed out their banks, that unkind  acronym was stretched to PIIGGS.

All PIIGGS have two things in common. First of all, government spending grew  dramatically — from an average of 43.2% of GDP in 2007 to 52.6% by 2010.

Spending was modestly trimmed by 2012 in a few cases, yet the ratio of  spending to GDP still remained 3 to 6 percentage points higher than it had been  in 2007.

This sad story was repeated in Cyprus, where government spending soared from  less than 34% of the economy in 1995 to 47% in 2010.

Despite this explosive growth of government spending among the PIIGGS,  economist Paul Krugman’s End the Depression Now! somehow attributes southern  Europe’s slump to “frantic, savage attempts to slash spending.”

In a recent New York Times column, Krugman suggested that Ireland suffers  from grossly insufficient government spending, and contrasted Ireland’s alleged  penny-pinching with “the true economic miracle that is Iceland … (which) thanks  to its embrace of unorthodox policies, has almost fully recovered.”

What actually happened is that government spending in Ireland soared to 66.1%  of GDP in 2010 — up from 36.8% in 2007 — when the government shocked the markets  by bailing out the banks in September 2010. The budget deficit suddenly spiked  to 30.9% of GDP. Irish bonds collapsed.


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