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).

42 thoughts on “Battle Of Britain – Krugman vs. Austerity Proponents”

  1. Greetings! I’ve been reading your site for a long time now and finally got the bravery to go ahead and give you a shout out from Porter Texas!
    Just wanted to say keep up the excellent job!

  2. Elaine, it was you who gave the Krugman citation to whom thanks were directed.

    And to all, warm recommendations to a morning re-read of this thread. Chockfull of nuts, not meant disparagingly. Nuts were regarded as food for the Gods, as time was whiled away in Valhalla.

    Let’s all send the link to Krugman’s “Republican economy” to Obama. Or at least the relevant quote about not getting the message out. Do your economic duty.

    Unless you are on the “hate obama” team, as some claim the blawg of being. Such subtleties excape my perceptions.

  3. Thanks to you and Krugman, I now know the answer that many born post 1935 have raised as a question.
    “Over all, the picture for America in 2012 bears a stunning resemblance to the great mistake of 1937, when F.D.R. prematurely slashed spending, sending the U.S. economy — which had actually been recovering fairly fast until that point — into the second leg of the Great Depression”

    IE, wasn’t/hadn’t the USA economy recovered from the Depression by the time of my birth (1936)???

    How can such a mistake be made, if we forget the personla aspect?
    Krugman says it was an “unforced error”. I wonder still….
    Such errors don’t just happen. I believe.

    Any historians here with economic interests???

    FYI, for a parallel mistake(mistake??), the attack on Pearl Harbor was NOT a surprise attack. The Japanese had warned, two months prior to Dec. 7th, that war would result, if we did not stop blockading them in the Pacific. That came with diplomatic post and had a stopdate.
    Replies by us? None recorded, it is said. So, FDR, my hero lied to us all. And now it is recorded as a historical truth.

    How long must one wait before truth is unearthed by some archeologists???

    MikeS, any speculations on the last?

    1. I have to differ about the attack on Pearl Harbor since it was a surprise and those who think it was not are mostly nut jobs who hate FDR. The US did NOT have any blockade anywhere against Japan. We did have an embargo against US shipments of oil and steel to Japan, which really hurt because the US is where Japan got most of its steel and oil.

      There was no question that Japan was pushed to the wall with the embargo and that the US knew it would have to go to war somewhere. The main expectation was the Japanese would move into Southeast Asia and take the colonies of Britain, France, and the Netherlands which would put them at war with only Britain, since the other two were conquered by the Nazis. So the main fault was that the local commanders at Pearl Harbor took inadequate measures in response to the war warning that both of them had been given just a couple of days before the attack. My Uncle Bob was on the beach in Panama in defensive positions with a machine gun on Dec. 7,1941 since his commander took the warning seriously and took measures comensurate with the threat.

      Both Kimmel and Short should have been court-martialed for their dereliction of duty, but there were more important things for FDR to do. It would have hurt morale in the armed services had such a thing been done, and diminished the standing of the commanders, so they got a pass.

  4. Cliff2,
    We all fund our own health care. The difference is in the cost to us and the coverage offered. Of course there is the factor of influence and convenience.
    I live in Sweden, and support single-payer systems, which I presume that Estland has as well.

  5. Bron:

    I’m curious. Your argument regarding Estonia’s economy is couched in anti-socialist terms. I assume you do know that Estonia has a state-funded health care system, yes? It consumes 5 percent of the country’s GDP.

    I urge you to do more research about Estonia’s unemployment rate, too, but in the meantime I’d love to hear your definition of socialism.

  6. Mornig after delirium: Indigo Jones is Krugman!!!!! in pseudonym.
    LottaKatz inspired, but the insane idea is solely my own responsibility. Anybody know him from before?
    He DOES remind me of a used car saleman in that he ignores the fine print, the oh so important teeth, and paints a facile easily understood picture.

    Leaving that, there were some good basic ideas: economy is a soft science and can not be tested, there are no models of reality. And you can do all the figure jiggling and word writing as you like and never get around that limitation.

    And Dredd introduces a complication to analysis, which might lead to better ones. Thanks.
    And to those I’ve forgotten, thanks also. You’ll all be on my next years Nobel dinner guest list.
    Who wants to sit next to Christina, she usually has the Literature prize laureate as her cavaliar?

  7. >>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.

    The same can be said for the bigger govt, more govt programs, stimulus, etc drive. The “crisis” drove them them bigger e.g. as Obama’s chief of staff said “never let a good crisis go to waste”. Politicians using fear is not new.

    Now instead ask yourself what their motivations are. hint: They are not righteous do-gooders. They are selfish individuals acting in their best interests just like the rest of. And which is in their interest – bigger govt more govt programs and more power/control or smaller govt, less/smaller govt programs and ultimately less power/control?

    In the US at least – we distinguish which side we favor by what govt programs they favor (social welfare vs military) but the answer is never smaller govt/smaller govt programs. Never.

    (to die hard republicans – remember the saying deficits dont matter comes from the right/reagan and was used as cover to ramp military spending)

  8. On ‘This Week,’ Paul Krugman Destroys Romney Surrogate, Calls Ryan Plan a ‘Fraud’

    KRUGMAN: Can I say, the Ryan plan — and I guess this is what counts as a personal attack — but it isn’t. It’s not an attack on the person; it’s an attack on the plan. The plan’s a fraud. The plan is a big bunch of tax cuts, some specified spending cuts, basically for poor people, and then a huge magic asterisk which is supposed to turn into a deficit reduction plan, but, in fact, if you look what’s actually in it, it’s a deficit-increasing plan.

    Video at link.

  9. Tell me what they want to hear and do what you damn well please…..that’s one way to run government…..

  10. LottaKatz sums it up.

    Aber—-Blouise, IJ is too good. He reminds me of a con man. Let us regard him for a good conman for now, exposing the bad guys

    I feel there is still many relationships, interlocking, pressure points,, dirty actors not exposed, and new “deals” on the IMF and WB menus to be shown.

    But let us by all means be kind to the one who produces these golden eggs, and hope for a golden series of such to paint a map for dummies of international “lurendrejeri”, surely there must be a german word which will help in the translation.
    Let me say “dirty dealings” and cover it all as to intent.

  11. Indigo Jones:
    Many people are under the impression that money the government takes in in taxes is taken out of the economy, whereas corporations spend their profits, but just the opposite is the case.”
    It’s where the government spends it that is at the heart of the today’s internal (U.S.) political war. It doesn’t really matter how much of the government money gets spent if it gets spent with the hand-full of corporations that make up the MIC. Currently, the government is just a funnel for money being transferred into the hands of the same old bad actors,

    I liked your take on the deep reason for the invasion of Iraq. That same rationale could easily be overlaid onto the financial crisis of 2007-2008 since the bad actors on Wall Street had their counterpoint in every European country. I recall when the Euro was being touted as the new monetary standard that would replace the dollar. That was a scary prospect and I read several articles about just how scary it was to the established banking interests. The world’s 1% doesn’t like change.

    Your three postings have been extraordinary in producing a concise framework for viewing the current (world) economic collapse, an engineered collapse IMO. Dude, (to echo Gene) you are on fire!

    Krugman is an old Science Fiction fan and this interview in Wired Magazine and video (I got there from BoingBoing) is a delight to read and view for Krugman fans:

    Here’s the paper referred to in the article, also a delight:

    “The Theory of Intersteller Trade, …1978, ,,,Assistant Professor, Yale University

    BTW- another weekend, another two days of provocative and excellent postings by the guest blawgers. Thank you all very much.

  12. This Republican Economy
    Published: June 3, 2012

    What should be done about the economy? Republicans claim to have the answer: slash spending and cut taxes. What they hope voters won’t notice is that that’s precisely the policy we’ve been following the past couple of years. Never mind the Democrat in the White House; for all practical purposes, this is already the economic policy of Republican dreams.

    So the Republican electoral strategy is, in effect, a gigantic con game: it depends on convincing voters that the bad economy is the result of big-spending policies that President Obama hasn’t followed (in large part because the G.O.P. wouldn’t let him), and that our woes can be cured by pursuing more of the same policies that have already failed.

    For some reason, however, neither the press nor Mr. Obama’s political team has done a very good job of exposing the con.

    What do I mean by saying that this is already a Republican economy? Look first at total government spending — federal, state and local. Adjusted for population growth and inflation, such spending has recently been falling at a rate not seen since the demobilization that followed the Korean War.

    How is that possible? Isn’t Mr. Obama a big spender? Actually, no; there was a brief burst of spending in late 2009 and early 2010 as the stimulus kicked in, but that boost is long behind us. Since then it has been all downhill. Cash-strapped state and local governments have laid off teachers, firefighters and police officers; meanwhile, unemployment benefits have been trailing off even though unemployment remains extremely high.

    Over all, the picture for America in 2012 bears a stunning resemblance to the great mistake of 1937, when F.D.R. prematurely slashed spending, sending the U.S. economy — which had actually been recovering fairly fast until that point — into the second leg of the Great Depression. In F.D.R.’s case, however, this was an unforced error, since he had a solidly Democratic Congress. In President Obama’s case, much though not all of the responsibility for the policy wrong turn lies with a completely obstructionist Republican majority in the House.

    That same obstructionist House majority effectively blackmailed the president into continuing all the Bush tax cuts for the wealthy, so that federal taxes as a share of G.D.P. are near historic lows — much lower, in particular, than at any point during Ronald Reagan’s presidency.

    As I said, for all practical purposes this is already a Republican economy.

    1. To Elaine, Krugman is right about what happened in 1937, but it was a FORCED error since FDR lost big time in the Congress. While the Democrats retained control, it was in name only since the Dixiecrats joined with the GOP in forcing the spending cuts. FDR had actively campaigned against some of his opponents in the Democratic party, but lost, and along with that, he got little more of what he wanted.

  13. rafflaw- “The only way out of this mess is a combination of stimulus spending, real taxation of corporations and wealthy individuals. The corporations have an incentive to move jobs overseas. That must stop immediately.”

    This statement confused me a bit raff. How, exactly, does increasing taxation on corporations incentivise them to keep jobs in the US in a global economy? I would think that would tend to have the opposite effect. By chance, did you mean something other than use of taxation to keep jobs here? (Legit question, not criticism, I promise- my knowledge of economics is a bit below abysmal).

  14. All are talking as if Ford invented the auto. Ford just innovated production. Demand was already there and the market was transportation, not just cars. The argument about supply preceding demand is only true for a new product. You can produce all you like but that does not mean you will get that many sales unless you want to start giving stuff away. No business would do that. So if you know how many sales you can make in a year and you’re hitting that production point then why would you use a tax break to hire another worker? I imagine Ford paid wages that were just high enough so that workers saw car buying as possible but only if they bought on credit. He was shrewd and he was no angel.

  15. Gene,

    Indigo Jones is good … he/she has a way with words that leads to easily understanding some otherwise confusing subject-matter.

    Gotta put him/her on my list of “always read”.

  16. Indigo Jones,

    I presume that the HFT is OTC, and thus not reported or particularly regulated.

    I´have heard that it is umpteen trillions or a factor of a million times the usual markets.

    Your view on Iraq, is interesting. Who would give Saddam such a stupid idea? Screwing with the USA sucks in most sane places where rulers hang.

    Your “radio” thingy sounds interesting also. Jokingly, I ask if you googleed it. Sources, sources.

    I tried to stir up something here via the press on Echelon but Linder at DN only stammered. Unusual for journalist.

    And the P2 connection is always there, it is said.

    But what is the deal in terms of economic impact with HFT flow. How significant is it, and what are they trading? Stocks? Damn significant as it pays for the high speed facilities. Is it just making a trillion times one cent that is good, or do they skim more than pennies on each transaction or dollar traded????

    Sorry for the questions. Ignore them if you wish. No offense taken in which case.

    It is a fascinating area to speculate on.
    Following the money.

    Money, power, politics and conflicts live on each other.

  17. @idealist707

    I wouldn’t wager a guess on the outcome of the European situation, but I do think the problems with the financial sector are endemic. I think the influence of high frequency traders, which are 2% of firms but account for 75% of transactions, are a big unknown that nobody seems to be watching closely enough. They’re just now paying for a $300 million private fiber optic cable connecting Wall Street to London, so they can get financial data 5 milliseconds faster…

    There’s an interesting theory about Iraq floating around that says we did invade because of oil, but not necessarily for access to the commodity. Oil is priced in dollars, so any country that wants oil needs to buy dollars. This reinforces the dollar’s position as a global reserve currency. In 2000, Iraq started pricing oil in Euros… if the rest of OPEC followed suit, we’d be screwed. So we invade in order to undercut an economically ascendent Europe.

    It wouldn’t be an isolated incident: throughout the postwar years, we supported right wing governments and dictatorships in those countries most affected by the current crisis: Portugal, Spain, Greece, and Italy. NATO maintained a clandestine military presents in these countries as well, called GLADIO, which didn’t become public until the 1990’s. Seems that this network was responsible for a spate of political terrorism right into the 1980’s.

    I have the feeling that the decision to include these countries in the Eurozone was either the result of a sort of pan-European nationalism (it would have been too insulting not to include them, while providing an emotional justification for excluding Turkey on grounds of a united “European” identity); or, the decision to include these countries in the Eurozone was an “experiment” in the “democratizing” influence of markets.

    While it might seem odd to suggest that a country like Italy was in need of “democratization” (Portugal had Salazar, Spain had Franco, and Greece had a US sponsored right wing dictatorship following the1967 coup), it is worth considering the complicity of top officials with the GLADIO program that effectively undermined their country’s national sovereignty. Berlusconi, who was a media mogul who kept changing the law every time he ran afoul of the law, was a member of Licio Gelli’s illegal P2 masonic lodge, which had tentacles connected all throughout the world of finance…

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