Battle Of Britain – Krugman vs. Austerity Proponents

-Submitted by David Drumm (Nal), Guest Blogger

On BBC Newsnight (video below), Nobel laureate Paul Krugman was pitted against venture capitalist Jon Moulton and Conservative MP Andrea Leadsom to discuss the merits of austerity. Krugman handily demolished their arguments. Krugman likened austerity to bloodletting, where if the patient gets sicker, even more bloodletting is called for. Krugman is in Europe on a book tour and his ideas are making headlines.

Moulton lets the cat-out-of-the-bag when he says the issue about austerity is really an issue about “too large a state.” Krugman calls him on his disingenuousness and  writes:

The austerity drive in Britain isn’t really about debt and deficits…; it’s about using deficit panic as an excuse to dismantle social programs. And this is, of course, exactly the same thing that has been happening in America.

That would be the America where politicians bemoan the deficit out of one side of their mouths while calling for tax cuts for the wealthy out of the other side. That would be the America where politicians bemoan the deficit out of one side of their mouths while calling for increases in defense spending out of the other side.

On the show, Leadsom argues that we should be “making it easier for the private sector” to create jobs. Krugman cites evidence that it is “lack of sales and not enough demand” that’s keeping businesses from expanding and the austerity policies are actually making that situation worse.

Austerity measures have been hailed by Jean-Claude Trichet, the former president of the European Central Bank, as “confidence-inspiring policies will foster and not hamper economic recovery.” Krugman calls this argument the “confidence fairy,” who will magically appear to reward the austerity policies. But after two years of austerity, the confidences fairy hasn’t materialized. A similar argument was made for Bush’s “job creating” tax cuts. Bush’s tax cuts had the desired effect: the rich got richer.

The effects of austerity are evidenced by Ireland’s 14.5% unemployment rate and Estonia’s Depression-level slump in real GDP of 18%. In Greece, Nobel economics laureate Christopher Pissarides said wealthy Greeks would benefit at the expense of poorer citizens were the country to exit the euro and reinstate the drachma. Wealthy Greeks have exported their money to other EU banks in anticipation of the return to the highly devalued drachma. Poorer Greeks need to maintain quick access to their cash.

Britain’s economy is in a double-dip recession having shrunk by 0.3% and 0.2% in the last two quarters. More bloodletting is prescribed.

H/T: Felix Salmon (Reuters), Mark Thoma (Economist’s View), Jennifer Ryan (Bloomberg Businessweek), Paul Krugman (NY Times).