Krugman sends us to the bottom of the class – the UK no longer deserves a ‘well-done’ box

17 May

So does the Portuguese bail out prove Osborne’s austerity measures right as he claimed last week?  Is his Plan A the right one to stick with, despite growing signs of weakening private sector performance?  Possibly not, if you talk to some economists in the US.

I met with Paul Krugman last week who has serious reservations about current UK macroeconomic policy.  He thinks that the austerity response to the current general failure of demand is inefficient and risks prolonging a liquidity trap, creating the possibility of a decade of lost growth Japan-style.  He strongly challenges the ‘Hellenisation’ of macroeconomic policy, as he calls the weak intellectual scare-mongering case for unforced austerity measures by government at a time, when the Greek case is entirely sui generis.

Krugman’s recommendation is that the UK needs instead is to follow a more US-style approach of credible long-run fiscal consolidation that bites strongly within five years and balances the books in 10 years. In the short-run, the UK needs more fiscal expansion, mainly in infrastructure.  Krugman waves away the two indicators that hawks point to in order to justify current austerity measures, tightening of QE and interest rates.  He argues that high inflation levels are a headline bulge, driven by one-off factors. Most importantly, wages are flat, with no danger of an inflation spiral.  Similarly, Krugman sees no real risk of the market ‘punishing’ UK profligacy – the CDS market is not making any movement to to do and the UK has always had relatively higher levels of debt.

Krugman concludes that current UK austerity policy represents a failure to learn from the economic policy debates of the 1930s.  It is recycling the same fallacies which were refuted at the time.  I didn’t ask Krugman to give current UK economic policy a mark out of ten.  I fear the message would have been significantly worse than a ‘could do better’.    What he did tell me was that his regular best-practice case-study box containing UK poverty reduction efforts  has been removed from the 2011 edition of his Macroeconomic text book.  It is replaced instead by a poverty alleviation policycase-study from a country whose macroeconomic policy is going in the right direction: Brazil’s Bolsa Familial.

Only time is going to show whether UK public sector funding is being cut back too quickly or not.  Certainly Krugman takes a policy position that has become more isolated over the past year.  But listening to Krugman illustrates that Martin Wolf’s account of the deep ideological and attitudinal divide between the ‘cutters’ and the ‘postponers’ on macro-economic policy remains very much alive.

(nb, this post was written a couple of weeks ago – the recent data continues to be ambivalent with softening manufacturing stats and confidence, though at least with (marginal) positive growth).

Trackbacks and Pingbacks

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