Waiting On Krugman

First, it is time to go back and check the history of this blog. In June of 2010 I said;

”We only have our opinions. I think it’s wrong. But if you think it’s the right thing to do for America -- cutting government spending and raising taxes to pay off the deficit -- you now have a test case to watch.”

That test case was the United Kingdom. Their new Conservative Prime Minister took the route advocated by America’s Republican Party and started paying down their deficit. Last Friday (while I was in Vegas) Paul Krugman gave me the update I was waiting on.

The Austerity Delusion

”And the British government has just marked its economic forecast down and its deficit forecast up.

They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.”

I think it’s a little early for Professor Krugman to declare the policy as failed but it’s a silly thought on my part. I really have little knowledge or opinion of economics outside of the ones Paul Krugman has written. I do read others from time to time (Stiglitz , Roubini, etc.) but no one has the influence on my opinion that Krugman does. As a matter of fact (for those that didn’t click the previous link) he provided guidance on the subject of timing from the man himself -- Keynes.

”But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

Following the advice of his economics guru, Krugman told us three years ago to “go big” -- to prepare a massive stimulus for the country. Here we are -- three years later -- and virtually everything Krugman warned us about on the economy has come true. So if he says that the United Kingdom’s policy of austerity is failing...I’m inclined to believe him.

”But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.

But she hasn’t: British growth has stalled, and the government has marked up its deficit projections as a result.”

And the real problem is (of course) that, if Krugman is right, this is our future -- sluggish growth and continued high unemployment. In other words, a “lost decade”. Just like you-know-who warned us.

Don Brown
March 27, 2011