“The results are in: Keynesians have been completely right, Austerians utterly wrong - at vast human cost” - so wrote Nobel laureate Paul Krugman today.
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“The results are in: Keynesians have been completely right, Austerians utterly wrong – at vast human cost” – so wrote Nobel prize winning economist Paul Krugman in the New York Times following yesterday’s announcement Britain is in a double-dip recession.
He is, of course, absolutely right; for starters, compare our own austerity-driven failure to the fate of the US economy. As Left Foot Forward reported yesterday, the US economy is now 0.8 per cent above its pre-crisis peak, while the UK economy is 4.3 per cent below, as Graph 1 shows.
Graph 1:
Krugman adds:
“It’s important to understand that what we’re seeing isn’t a failure of orthodox economics. Standard economics in this case – that is, economics based on what the profession has learned these past three generations, and for that matter on most textbooks – was the Keynesian position.
“The austerity thing was just invented out of thin air and a few dubious historical examples to serve the prejudices of the elite…
“I wish I could believe that this would really be enough for us to move on and consider what can be done, now that we know that the ideas behind recent policy were all wrong. But that’s wishful thinking, I suppose.
“Nobody ever admits that they were wrong, and Austerian ideas clearly have an emotional and political appeal that is resilient to any and all evidence.”
• Krugman savages the “austerity debacle” 30 Jan 2012
• Krugman: Coalition is “bleeding” Britain dry 1 Dec 2011
• Obama/Cameron love-in comes unstuck over cuts 25 May 2011
• Krugman joins chorus for Tobin tax 30 Nov 2009
• Krugman: balanced budget would be “worst thing for future generations” 29 Sep 2011
And it’s not just progressive economists saying so – some on the right are finally coming round to recognising the insanity of extreme austerity.
The Daily Beast’s Andrew Sullivan writes:
“If austerity kills growth and thereby revenues, the debt problem can worsen. And Britain, remember, isn’t in the eurozone; it has some currency flexibility to ride some of the shocks. Even so, the passage this ship has to pass through to growth and lower debt is getting narrower and the rocks and tides more treacherous.
“The goal of structural fiscal balance within one five-year parliament has already been abandoned in the face of reality.
“As I’ve said before, I have a long record of fiscal hawkishness. I’m a Tory and want them to succeed. But the one time I worry about fiscal retrenchment is in a period of global recession, where premature austerity can hurt, not help.
“The key is to stimulate enough to get the economy moving on its own momentum and then phase in serious long term structural budget cuts and tax reform.”
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134 Responses to “Krugman: “Keynesians have been completely right, Austerians utterly wrong””
Anonymous
Crash caused by too much borrowing and spend.
Voodoo economics. Borrow and spend lots more because the cure is the same as the cause.
Now look at the numbers. There are no overall cuts. Spending is up. Even Ed Balls has had to admit that spending is up. So if spending is up, and we have a double dip, its not cuts.
130 bn of cuts are needed to get the books balanced. Massive defaults are still inevitable because you’ve hidden the debts off the books.
It’s not looking good for the UK citizen because of politicians and their frauds.
Albert Spangler
I have become increasingly angry at what I am starting to believe is a mass duping of both the political class and the public. We have been so unrelenting forcefed the idea that private, market driven approaches with increasingly squeezed public spending is the way to achieve some kind of eudaimonic existance that we have completely internalised the ideas…
Yet when you actually look into the history of neoliberal economics, a significant majority of it is just entirely made up! There is little to no evidence that monetarist policies and ‘economic liberalisation’ benefit anyone other than the burgeoning corporations who increase their share of market dominance at the expense of the public.
Freidrich Hayek was routinely rubbished for the lack of evidence in his economic theories, especially since the man was a philosopher, not an economist, yet now we somehow believe him to be a credible economic theorist thanks the likes of Thatcher and Regan. I feel ashamed of having been so firmly duped into believing that markets are more efficient, and being forced to believe in the false dichotomy of ‘market vs state’, like the only concievable option against having state controlled inflexible dehumansing bureaucracy is to sell everything off to corporations and pretending this somehow makes things better for people.
How much evidence does there need to be that these theories are nonsensical, damaging and only serve to promote greed and wealth for the sake of wealth? When a popular uprising destroys the limited progress we’ve made so far?
tangentreality
Firstly, Keynes advocated running a temporary 3-4% deficit during short-term recessions. He advocated running a surplus during periods of economic growth. He never advocated running deficits of up to 11% as a permanent structural feature of the public finances.
Next, the Government haven’t given us ‘austerity’. In cash terms, public spending has actually risen – in real terms, it has fallen by about 3%. That’s not austerity – that’s simply trimming the edges of the debt.
Thirdly, the US is in a different position to us. Obama did not inherit a statute book filled with strangling regulations, nor is the US part of a supranational confederacy which maintains legal primacy, hindering his ability to pass new laws. Their deficit was also lower than ours when Obama took office (around 9% of GDP, instead of 11%). The US also has a greater trade portfolio than we do – we are shackled to the corpse of the EU.
The Government’s economic policy has basically been to trim State spending in a token gesture, print money to help inflate the debt away and raising already high taxes to choking point, whilst keeping their fingers crossed that the private sector would recover.
What actually needs to happen is root-and-branch reform of the public sector and benefits system to help finance tax cuts, and a radical overhaul of business and employment law to cut red tape and regulation. But that’s both politically controversial and technically difficult. So they didn’t bother.
Labour’s proposals to spend £20billion more a year and leave the red tape and regulation would not engender a private sector recovery, but would signal panic in the bond markets. International investors would start questioning the UK’s ability to pay its debts, which would, in turn, signal a rise in interest rates, making a recovery even less likely, not to mention another fall in tax revenues.
Keynesianism isn’t applicable to the deleterious state our public finances are in, and real ‘austerity’ to fund tax cuts – the best form of fiscal stimulus – hasn’t been tried.
Merlin House
You just don’t get it do you? If your policies force many people out of work, then more people will claim unemployment benefit and the overall costs will rise. Austerity is not the way – we need to encourage more people into work so that they can become net contributors to the economy.
tangentreality
I’m not the one that doesn’t get it. My point is, if the Government stimulated demand by reducing consumption taxes and making it CHEAPER to employ people, and reformed employment law so that companies weren’t so scared of employing people because of all the implicit liability it entails, we might actually see unemployment FALL.