“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.”
134 Responses to “Krugman: “Keynesians have been completely right, Austerians utterly wrong””
Stephen Wigmore
Okay, in that case have the balls to actually link to the equivalent graphs for over-all state spending in the US, EU and UK.
Despite all the rhetoric public spending in the US has been falling (albeit slowly) and taxes have been kept low. They also have much lower regulation, much better demographics and a much wider trade links.
Here in the UK public spending has actually risen, taxes a high and we are being strangled by regulation, inflation and proximity to the EU.
Ditto for the EU. Show me a graph that shows that overall EU public spending has fallen dramatically (rather than risen) in correlation with the stalling in GDP and then I will believe you. And show me the effect on GDP if you strip out the complete collapse across much of southern Europe caused by massive deficits and the Euro.
Until then it’s just rhetoric.
Tangent Reality
Owning a few Lefties… the comments make an amusing read… http://t.co/BOVlX8pc
Cormac Hollingsworth
Krugman tears up Osbornomics“Keynesians have bn completely rite, Austerians uttrly wrong” http://t.co/xzULZJG7 @cormacholly @marcusaroberts
Gordon Ingram
I notice you don’t have the balls to link to any graphs either!
Try http://www.ukpublicspending.co.uk/charts.html for the UK data.
You are aware, of course, that the slight rise in UK public spending you mention factors in a massive rise in interest payments? You can see from the charts above that most other categories of spending have been flat (in real terms) or falling. It’s actual investment that matters when it comes to stimulating the economy, not paying off debt.
Furthermore, most of the proposed cuts have yet to feed into the public spending figures: but all this talk of austerity has already deterred consumers from spending which in turn has deterred businesses from investing.
BTW I’d love to know the causal mechanism by which you believe the Euro crisis in southern Europe (hardly a major trading partner for the UK) has lowered the GDP over here. (Apart from the way the media feeding frenzy over this may have added to the consumer panic over the state of the economy – but this is hardly likely to be as important a factor in that regard as our own Government’s cuts.)
Gordon Ingram
“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.”
(a) As deleterious as our public finances may be, *private* debt is at historically much higher levels, relative to household income. How does that fit that into your thinking? Let’s not forget that this economic crisis started as a *private* debt crisis, which then had a knock-on effect on the public finances. If you shrink the state drastically, how can you guarantee that it will be big enough to bail out the next private debt crisis that comes along?
(b) Perhaps you could name a country where “real ‘austerity'” in public spending to fund tax cuts has been tried and has led to a significant and lasting economic stimulus. I can’t think of any.