How to Deceive Friends and Influence People
Wednesday, June 22, 2011 at 2:56AM 
Krugman prays he is right There is an interesting opinion piece by Nobel Prize winner and Enron advisor Paul Krugman dated June 18. Krugman's approach in past articles to our economic problems is to print money.
This column says that while some countries are in trouble, it will not spread. He quotes the new head of the Bundesbank:
The current crisis is no crisis of the euro. It is a sovereign debt crisis of individual, smaller countries in the euro area, which is caused not least by the disregard of the rules.
Of course the head of a bank is going to say this. Can you imagine a banker who is the new head of a bankrupt company saying the truth? Krugman then produces this chart to justify his opinion that things are just fine in Europe.
I must confess that this chart at first confused me. I did not have time to study it as it was a busy day for me. Then I remembered a book I had read called How to Lie with Statistics and remembered some of the tricks. First, notice that the scale does not begin at zero. The reason this is done is that it makes the contrast with the rest of the chart more pronounced. At first glance it appears that Ireland and Spain have no debt. They do. It also was quite confusing in that it showed Ireland and Spain with a budget surplus. Everything I have been reading says this is false. Then I noticed that Krugman had used data from 2006/2007. What is the more current data?
Here is the Irish Financial Times from Dec 2010
Irish Economy 2011: Budget 2011 forecasts a deficit in 2011 of €17.7bn and public debt as a ratio of GDP (gross domestic product) will rise to 99%.
As you can see this is quite different than the chart Krugman provides. The article also tells us that the deficit to GDP is projected to be 9.4% of GDP. Ireland is not running a surplus. In fact the deficit for last year was the largest in the EU:
Official EU statistics show that Ireland again recorded the biggest budget deficit in the EU last year. Ireland's deficit was 32.4% of economic output, though this was mainly because the EU figures include the cost of injecting more money into Anglo Irish Bank and Irish Nationwide
Greece had the second-biggest deficit at 10.5% of GDP, while the UK was third with 10.4%. Spain and Portugal recorded just over 9%.
As the article points out most of this was a one-time bank rescue package. But it is predicted to return to about 10%. Rather than a budget surplus and a debt to GDP ratio of 25, Ireland today is running a deficit of 9.4% of GDP, and the total debt is 99%. It is expected to peak at 111%.
What about Spain? On Krugman's chart Spain is running a surplus. What is the truth?
Spain’s deficit was 9.2% of GDP in 2010. The government aims to cut the deficit to 6% of GDP in 2011.
Other articles suggest that Spain will fail to cut this much.
Notice that Italy for some reason is not on the chart. What about other European countries? From CNN:
Topping the European debt league is Greece with 142.8% government debt to GDP ratio, followed by Italy (119.0%), Belgium (96.8%) Ireland (96.2%), Portugal (93.0%), Germany (83.2%), France (81.7%) Hungary (80.2%) and the United Kingdom (80.0%).
Krugman might be right and the problem will not spread beyond Greece and Ireland. I hope he is right. But there has to be a reason that Prime Minister Merkel of Germany is supporting bailouts when it has to cost her the next election. She realizes that if a firewall is not built the problems will spread.
Krugman's chart, to be charitable, is misleading.
Economics 
Reader Comments (2)
You make two pretty strong and equally negative aspersions about Mr. Krugman's charactor in the first sentence. You called him a "Nobel Prize winner and Enron advisor". What do you expect from someone like that?
You're making too much out of the current data. This is just a bump in the road, don't you know? So that's why it's OK to use data that's five years old. Things will be back to normal soon if we just print money. :P
I'm confused by your comment about Merkel. Yes, they want to keep the problem from spreading. Do they, does Merkel, really think another bailout, i.e. kick the can down the road, is going to solve it? It seems this is hoping against hope.