The New York Times Thinks Bleeding Cyprus is “Strong Medicine”

By William K. Black
(Cross posted at Benzinga.com)

I’m announcing the New York Times award for incompetence in macroeconomic reporting (IMR, pronounced like “screamer”).  I suggest that the paper offer as a prize to awardees a two hour lunch with Krugman in which he provides a remedial economics lecture.  My premise is that it is impossible to be a NYT reporter and fail to know that the paper has a Nobel Laureate in economics who writes a regular column for the paper and frequently discusses making economic downturns worse by inflicting self-destructive austerity.  Even the most casual reader of Paul Krugman’s columns would know that opposition to austerity has long been the dominant view among economists and that over the last five years events here and in Europe have again confirmed that view. 

I do not, of course, insist that any NYT reporter agree with Krugman and the dominant view of economists.  The dominant view of economists and finance scholars on a wide range of issues has proved disastrously wrong.  The views of austerians, however, have proven consistently wrong.  Their predictions have routinely failed by massive margins.  They are ideologues whose real goal is to dramatically reduce governmental spending on some of the most popular and beneficial programs, particularly the safety net.

What I do expect out of NYT reporters is critical thinking and refusing to accept as a purported “fact” that austerity in response to a Great Recession is a rational policy.  They should certainly not present such an assertion as a fact.  If they wish to argue in favor of austerity they should alert their readers that it is a minority view among economists and admit that its proponents have consistently been proven wrong – and then argue why they believe this time will be different.

(Importantly, the predictive track record of economists and finance experts who held the dominant view that markets were so “efficient” that material “accounting control fraud” and hyper-inflated bubbles were impossible had a terrible predictive record over the last quarter-century before this crisis.  White-collar criminologists had a far superior predictive and explanatory record about control fraud and hyper-inflated bubbles.)

What we get out of NYT reporters – as a typical practice – in reporting on Eurozone austerity is the opposite approach.  They may acknowledge that austerity has proven self-destructive – but they normally do so in an overall presentation that implicitly asserts that austerity must be desirable because it is so harmful.  This passes for logic among theoclassical economists.  The usual austerity metaphor is to “medicine.”  Medicine may taste terrible and cause one brief pain, but only the most childish would fail to take their medicine because it briefly makes our lips curl in distaste.

The economic truth, however, proved repeatedly during this crisis, is that austerity is to “medicine” as bleeding a patient was to “health care.”  It violates the Hippocratic Oath’s central precept that the physician must “do no harm.”  The bubbles cracked in 2006, and the Eurozone has been inflicting austerity on its population for over five years. No one serious, and honest, in their reporting can use the medicine metaphor.

As I explained in a recent article, austerity has inflicted a gratuitous second recession on the Eurozone in general – and the periphery is the epicenter of an über-Depression in which unemployment rates are far higher than the largest European economies suffered during the Great Depression.  Indeed, unemployment in France and the U.K. today is broadly comparable to the average unemployment level these Nations suffered from 1930-1938.  Austerity is the most self-destructive economic policy since the Great Depression and it is causing immense suffering and waste.

My first nominee for the IMR award is an article by James Kanter dated April 3, 2013 and entitled “I.M.F. and Europe Set Tough Terms for Cyprus Bailout.”

The article begins by using IMF code for austerity.

“This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement issued by the fund, which is based in Washington.

It is worth making special note that Kanter’s article about the imposition of austerity never uses the word “austerity” – repeatedly substituting euphemisms (“great efforts”) for a word that is justly reviled by hundreds of millions of citizens of the Eurozone.  The reporter’s refusal to call austerity “austerity” is a “tell.”

A reader of Krugman’s columns (or our columns or the columns of any decent blog site that discusses macroeconomics) would know that recent IMF studies have confirmed the harm produced by austerity and the greater than anticipated (by the IMF) benefits of fiscal stimulus as a response to the Great Recession.  But a reader of Kanter’s column would learn none of these critical facts.  Instead, they would get another dose of the “medicine” metaphor.

“Though it has not yet been made public, officials say the agreement includes budget cuts, the privatization of state-owned assets and other conditions Cyprus must meet.

It was another dose of strong medicine for Cyprus, which agreed last month to restructure an outsize banking sector by forcing huge losses on bondholders and big depositors in the country’s two biggest lenders.”

The first paragraph describes, but refuses to name, the infliction of austerity and the second paragraph says this represents more “strong medicine.”  These passages foreshadow the single most bizarre aspect of the IMR article – the author reports that his latest euphemism for austerity (“the deal”) will harm Cyprus’ economy and people.

“Before the deal, the Cypriot economy was expected to shrink 3.5 percent this year, with unemployment hitting nearly 14 percent. Now, under the strict bailout measures, some experts predicted the economy could contract 5 percent or more, sending unemployment even higher.”

Exactly, when one is anemic we bleed you.  It makes you even sicker, but theoclassical economics has only one patent “medicine” that it markets as a cure-all for every problem – crush government spending, particularly those programs that work, and make crony capitalists wealthy by selling national assets to them at fire sale prices.

Oh, and “the deal” inflicted on Cyprus was voluntary in the sense that “Big Mario” gives you the choice of paying him back with the “vig” or having him use a baseball bat on your knees.

An inquiring reporter might wonder why the IMF was insisting on imposing austerity when it knew that doing so would further harm Cyprus. Instead, Kanter treats assertions that are logically self-contradictory as facts.

“In an apparent show of unity on Wednesday, Ms. Lagarde jointly issued a statement with Olli Rehn, the European commissioner for economic and monetary affairs, pledging to ‘stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people.’”

So, a reader would learn that the EU’s and the IMF’s method of “helping to restore financial stability, fiscal sustainability and growth” to Cyprus is to adopt policies that they have repeatedly shown will produce recurrent financial instability, fiscal crises, draconian cuts in vital public services, and negative growth.  How is the reader to interpret the fact that Kanter has just admitted that economists know that austerity will do the opposite of what the IMF and EU leaders claimed and that the IMF and EU’s track record in predicting that austerity will produce these results is pathetic?  Kanter does not even acknowledge a contradiction between these two passages in his article that require resolution if the reader is to make any sense of Kanter’s claim that the (never-to-be-named) austerity is a “dose of  strong medicine” for what ails Cyprus.

I can speed up Krugman’s remedial lunch with Kanter by bringing to Kanter’s attention what any reader of the NYT interested in austerity would know through reading even a single Krugman column.

“Consider how things were supposed to be working at this point. When Europe began its infatuation with austerity, top officials dismissed concerns that slashing spending and raising taxes in depressed economies might deepen their depressions. On the contrary, they insisted, such policies would actually boost economies by inspiring confidence.

But the confidence fairy was a no-show. Nations imposing harsh austerity suffered deep economic downturns; the harsher the austerity, the deeper the downturn. Indeed, this relationship has been so strong that the International Monetary Fund, in a striking mea culpa, admitted that it had underestimated the damage austerity would inflict.

Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing. And because austerity policies haven’t been offset by expansionary policies elsewhere, the European economy as a whole — which never had much of a recovery from the slump of 2008-9 — is back in recession, with unemployment marching ever higher.”

Those are economic realities.  How have the EU and the IMF responded to their endemic predictive failures and the IMF’s studies that show that austerity is even more harmful than IMF economists had believed?  Krugman is most devastating in calling them to task for their lack of intellectual integrity.

“Thus in January 2011 Olli Rehn, a vice president of the European Commission, praised the austerity programs of Greece, Spain and Portugal and predicted that the Greek program in particular would yield ‘lasting returns.’ Since then unemployment has soared in all three countries — but sure enough, in December 2012 Mr. Rehn published an op-ed article with the headline ‘Europe must stay the austerity course.’

Oh, and Mr. Rehn’s response to studies showing that the adverse effects of austerity are much bigger than expected was to send a letter to finance minsters and the I.M.F. declaring that such studies were harmful, because they were threatening to erode confidence.”

Again, I am not calling for NYT reporters to become Krugman clones.  I’m arguing that it is inexcusable not to take advantage of his expertise as a resource and that he writes well enough that reading his columns should be a regular practice of any reporter writing about the eurozone crisis.  We want reporters to exercise critical thinking and independence.  We want them to ask the embarrassing questions of the European leaders who have created the über-Depression. We want that not because we wish to see them embarrassed (they are incapable of embarrassment) but because asking the tough questions ferrets out the analytical flaws and exposes the false statements about the data.

Instead of tough questions, however, we get Kanter’s bizarre invocation of the latest avatar of the confidence fairy.

“Over the course of the negotiations, the spotlight fell on whether the monetary fund was being too forceful in pressing for the country to quickly reduce its debt and impose losses on bank shareholders and big depositors. The approach strained relations with the European Commission, which had concerns about the confidence-sapping effects that such aggressive measures might have on other countries.”

The EC’s grave concern is not the millions of unemployed Europeans, the brain drain in the periphery as university graduates promptly emigrate, or the massive increase in income and wealth inequality – no, they are worried about imposing losses on the one percent.  We are being warned that if the one percent suffers substantial losses the wealthy will lose confidence in (what/who?) and they will cause yet another economic crisis through some unidentified process Kanter does not explain.

Perhaps we should start with baby steps in reportage.  Here is a tutorial on the questions to explore in a column the next time an EU leader with a track record of being wrong about everything makes a statement like this: “Ms. Lagarde said Cyprus needed to make substantial spending cuts ‘to put debt on a firmly downward path,’ including in areas like social welfare programs.”

A Nation is not like a household (even a Nation that has made the terrible mistake of giving up a sovereign currency and adopting the euro).  If a Nation cuts spending on “social welfare programs” when they are most needed during a severe economic contraction two results are certain.  It will increase the misery inflicted by the recession or depression.  It will also slow its recovery from the economic crisis compared to what would have been the result had it maintained, or preferably, increased spending.  When a Nation cuts its social spending during a serious contraction it makes the problem of inadequate demand worse.  The result is that the contraction is likely to deepen and any recovery is often halted and reversed.

As a recession deepens tax revenues fall sharply and GDP falls.  The ratio of debt to GDP frequently increases due to austerity – the opposite of what the austerians promise.  This is what Krugman explained in the third paragraph of the excerpt from his column quoted above.  So, when Lagarde or Rehn claim that austerity puts “debt on a firmly downward path” ask why anyone would take comfort from that claim given that austerity also puts the GDP “on a firmly downward path.”  The resultant debt-to-GDP ratio often rises due to austerity.  (If the ECB fails to block the bond vigilantes the result can be a sovereign debt death spiral in which austerity not only increases the debt-to-GDP ratio but even the absolute amount of debt and the interest expense of that debt.)

Reporters who uncritically accept the austerians’ medicine metaphor have aided and abetted Prime Minister Merkel, Rehn, Mario Draghi (and his predecessor), Prime Minister Cameron, and Lagarde’s creation of the gratuitous über-Depression.  The cost of these self-destructive policies, embraced in President Obama’s proposed budget, is measured in the trillions of dollars of lost GDP and many millions of jobs.  We cannot afford to continue this insanity.  Reporters need to become part of the solution.  All they need to do so is to adopt the finest standards of professionalism and begin to ask tough questions and kick the analytical tires.  Reporters (appropriately) kick the tires when they talk to us (UMKC economics), and we have a superb track record of predictive accuracy and analytical rigor.  The austerians cannot survive having their claims subjected to normal scientific and logic tests.

Has the NYT ever had Krugman spend two hours educating its financial reporters about austerity and the euro’s design defects?  That would be one of the best investments it could ever make in raising the quality of its reportage on these issues.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @williamkblack