Paul Krugman: No Greek "death spiral" for Puerto Rico so long as US rejects austerity

The economist continued to hammer the EU on its love of austerity measures that neither can nor do work

By Scott Eric Kaufman

Published August 3, 2015 11:59AM (EDT)

Paul Krugman       (Reuters/Zainal Abd Halim)
Paul Krugman (Reuters/Zainal Abd Halim)

New York Times columnist Paul Krugman obliquely continued his discussion of the many ways in which the European Union has failed Greece Monday morning, outlining how the United States' response to a similar economic downturn in Puerto Rico was handled.

When Puerto Rico's manufacturing productivity plateaued and outmigration created record-low participation in the workforce, instead of imposing austerity measures on the territory, the federal government just continued to fulfill its legal obligation to provide the people with a social safety net.

And how terrible is that, really? The safety net is there to protect people, not places. If a regional economy is left stranded by the shifting tides of globalization, well, that’s going to happen now and then. What’s important is that workers be able to find opportunities somewhere, and that those unable for whatever reason to take advantage of these opportunities be protected from extreme hardship.

There is, of course, the problem of maintaining public services for those who remain. Compared with Europe, America benefits hugely from having an integrated national budget – but it’s not integrated enough to deal with really big regional shocks. And Puerto Rico faces some risk of a death spiral in which the emigration of working-age residents undermines the tax base for those who are left, and deteriorating public services then lead to even more emigration.

What this tells us, in turn, is that even for a part of the United States, too much austerity can be self-defeating. It would, in particular, be a terrible idea to give the hedge funds that have scooped up much of Puerto Rico’s debt what they want — basically to destroy the island’s education system in the name of fiscal responsibility.

Overall, however, the Puerto Rican story is one of bad times that fall well short of utter disaster. And the saving grace in this situation is big government — a federal system that provides a crucial safety net for American citizens in times of need, wherever they happen to live.

Read the rest at the New York Times...

Scott Eric Kaufman

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Austerity Economics Greece Paul Krugman Puerto Rico