Pay For Past Sins With Stimulus

A blog about business and economics.
May 16 2013 12:38 PM

Pay For The Sins of the Past By Working Harder, Not By Throwing Millions Into Unemployment

The Social Democratic Alliance chairman Arni Pall Arnason (L) arrives for a meeting with the President Olafur Ragnar Grimsson at Bessastaoir, the Presidential residence on April 29, 2012.

Photo by HALLDOR KOLBEINS/AFP/Getty Images

Everyone is jumping on this Michael Kinsley critique of Paul Krugman today because it appears to vindicate a key Krugman claim that excessive moralism drives the politics of austerity. "I don’t think suffering is good," Kinsley writes "but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be."

I don't really think Kinsley is mistaken about this so much as he is mistaken about the nature of our sins and the nature of the price that has to be paid. Think about Iceland, a model that Krugman has hailed in the past, and consider their story of sin and redemption.


What Iceland did wrong was to essentially pretend that they'd developed a super-innovative new model of hyper-profitable banking. That innovation allowed Icelandic banks to offer generous terms to depositors to soak up more and more capital. But it turned out to be an illusion. The miracle of Icelandic finance turned out to be nothing more than poor regulation and tail risk. So the sector went bust and a huge blow was dealt to the economy. But rather than coping with the blow by implementing hard money and huge budget cuts, spurring mass unemployment and a years-long episode of penance, Iceland paid its penance through currency depreciation and repudiation of many foreign debts. You cannot escape your punishment this way. Depreciation and follow-on capital controls have made it much harder for Iceland's citizens to go on vacation in Spain or study abroad in the United States than it used to be. Icelanders need to smelt more aluminum and catch more fish than ever before, even while consuming less than ever in foreign imports. Foreigners don't want to lend Iceland money or loan money to Icelandic firms and households. Belts have to tighten. It's an all-around bad situation.

But. Iceland's unemployment rate is below five percent. The country is paying for the sin of excess debt with the penance of hard work. Which makes sense. When you discover you're less wealthy than you thought you were, the appropriate response is to work longer hours to earn more money it's not to quit your job. Longer hours and joblessness are both forms of punishment, but longer hours is a punishment that fits the crime.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


The World

The Budget Disaster that Sabotaged the WHO’s Response to Ebola

How Movies Like Contagion and Outbreak Distort Our Response to Real Epidemics

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

Everything You Should Know About Today’s Eclipse

An Unscientific Ranking of Really, Really Old German Beers


Welcome to 13th Grade!

Some high schools are offering a fifth year. That’s a great idea.


The Actual World

“Mount Thoreau” and the naming of things in the wilderness.

Want Kids to Delay Sex? Let Planned Parenthood Teach Them Sex Ed.

Can Democratic Sen. Mary Landrieu Pull Off One More Louisiana Miracle?

  News & Politics
Oct. 22 2014 9:42 PM Landslide Landrieu Can the Louisiana Democrat use the powers of incumbency to save herself one more time?
Oct. 23 2014 11:51 AM It Seems No One Is Rich or Happy: I Looked
The Vault
Oct. 23 2014 12:02 PM Delightfully Awkward Studio Action Shots of Players, Used on Early Baseball Cards
  Double X
The XX Factor
Oct. 23 2014 11:33 AM Watch Little Princesses Curse for the Feminist Cause
  Slate Plus
Oct. 23 2014 11:28 AM Slate’s Working Podcast: Episode 2 Transcript Read what David Plotz asked Dr. Meri Kolbrener about her workday.
Brow Beat
Oct. 23 2014 12:01 PM Who Is Constantine, and Should You Watch His New Show?
Oct. 23 2014 11:45 AM The United States of Reddit  How social media is redrawing our borders. 
  Health & Science
Bad Astronomy
Oct. 23 2014 7:30 AM Our Solar System and Galaxy … Seen by an Astronaut
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.