Monday, January 30, 2012

Krugman and the UK Austerity Debacle

Well, the British public seem to be strangely relaxed about our embrace of double-dip recession, but at least Paul Krugman (the Austerity Debacle. - NYTimes.com) is on the case.

Let's just recap: the Tory-Lib Dem government insisted two years ago that the only way to deal with our economic crisis was a sharp retrenchment in public spending, to bring down the deficit and create the kind of climate in which business would invest. (Labour, it must be admitted, also proposed cuts, although not quite so swingeing).

Some (notably Krugman, and on this side of the pond Martin Wolf and Samuel Brittan) objected that this was crazy - the global scarcity of safe assets meant that our debt could easily be refinanced and that deficits would be necessary to avoid a crunch in demand and a return to recession.

Who was right?

What's alarming about all this is that so many people who should know better embraced the theory that an economy suffering a brutal demand shock could return to growth whilst the private and public sectors both set about reducing their debts, at the same time as most of our key trading partners were going through the same experiment.

Of course, debt levels need to go down, but sustainably. The best analogy I can think of is of an obese patient who needs to lose weight. Any sensible doctor would recommend a steady reduction in calories over a long period of time to get the patient's weight back down to a healthy level, given that research shows that weight lost quickly is easily regained.

But what we've decided to do is to starve the patient to death.