Will someone please shut Krugman up By Jeremy Warner Economics Last updated: October 23rd, 2010
Sorry, a bit late on this one, but I see old Kruggers, Nobel prize winner and New York Times columnist, is at it again. Not content to lecture his own country’s administration about how they are not spending enough, Professor Krugman lambasts Britain’s coalition government in his latest column for its deficit reduction plan, which he reckons will condemn the UK to a depression.
Here’s a taste: “What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it”.
Good stuff, and who knows? Maybe he’s right. Yet the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels. He accuses the Tories of being “ideological” in their single minded pursuit of deficit reduction, and of using the crisis to dismantle the welfare state, yet he conveniently skirts around the underlying issue, which is in essence that the country can no longer afford this expenditure.
Osborne’s fiscal consolidation is aimed only at removing the structural deficit – which is the bit that won’t go away when the economy returns to normal. The Obama Administration’s reluctance to take similar action in the US is extraordinarily irresponsible, and one of the reasons why the Democrats are so hopelessly down in the polls.
Surveys show that only about 20 per cent of Americans are Krugmanesque type liberals. Some 40 per cent count themselves as conservatives and the rest, the disenfranchised middle, reckon on being moderates. Yet as others have observed, if you asked the right questions the great bulk of Americans would say they are both liberal and conservative – socially liberal, that is, but fiscally conservative.
The striking thing about my last two visits to the US is just how worried by the deficit most Americans are. Indeed they are ashamed by it, and rightly take the view that unless it is tackled soon, it will seriously undermine America’s long term economic prospects, not to mention its positions in the world. Obama’s failure to realise this, and to continue to force a minority liberal agenda down everyone’s throat, is the reason he’s lost the plot. To restore his presidency, he needs to move towards the centre, and that includes the construction of a robust deficit reduction plan that begins with dispatch.
Professor Krugman suggests that Britain has nothing to fear from excessive public debt, which is still as things stand below its long run historical average. He’s technically right about this, but like a lot of statistics used to support a particular, ideological position, it’s completely meaningless. Looking at the path of UK public debt as a percentage of GDP, there have indeed been quite long periods when it has been much higher than it is now, but these periods mainly coincided with prolonged and all embracing war – first the Napoleonic wars, then later the Boer war and the first world war. Britain had barely recovered from the financial consequences of the first world war by the time the second world war hit.
The big point missed by those who think elevated public debt doesn’t matter is that these periods of excessive debt utterly crippled the UK economy. Indeed, Britain’s decline through the twentieth century as an economic superpower directly correlates with increased indebtedness. Fighting wars is not good for economic health
Both America and Britain are again technically at war, but these conflicts are relatively small affairs by past standards. What makes the current unsustainable trajectory of public debt so worrying is that it’s not military spending that is the problem this time around. We cannot rely on demilitarisation to come to the rescue of the public finances, as it has in the past. Public debt is excessive for entirely different reasons – the excess in public spending is not on fighting wars but on treating ourselves – and unless America does something about it soon, the US will decline economically and geo-politically over the next fifty years as surely as Britain did in the last century.
