“Give me a stronger economy, and I’ll turn into a fiscal hawk”, said Paul Krugman on BBC Radio 4’s Today programme this morning, adding for good measure the old chestnut of “please make me chaste, but not yet”.
Except that we all know that this is not what would happen in practice if Professor Krugman got his way, the UK Government abandoned its deficit reduction strategy and instead added a fiscal stimulus of some 2pc of GDP.
Actually what would happen is that this combination of spending and tax giveaway would become entrenched, it would make little or no difference to output and at some stage in the future, the Government would be forced into an even more painful consolidation than the one it is attempting to push through today.
To be fair on Krugman, he cannot be accused of turning a blind eye to the build up of debt during the credit boom, unlike many of those, such as the shadow Chancellor Ed Balls, who now share the same economic platform. From a quite early stage, Krugman was shouting from the rooftops about the dangers of what was going on.
But anyone who regulary reads his New York Times blog knows where essentially he’s coming from. In the US, he calls himself a progressive. In Europe he’d be called a social democrat, and in another age, an outright socialist. He believes in big government, strong social safety nets and use of the tax system to reduce social inequalities.
He pretends to be an impartial economic analyst of events, but he is not. He is as much an idealogue as the right wing conservatives he mocks.
Now look, there’s quite a lot of what Krugman advocates for the UK which it is possible to agree with. He’s right about government investment. This has been cut more deeply than anything else so far, yet this is precisely the sort of spending that should be maintained, or even increased in an economy as depressed as the UK.
It may also have been a mistake to have front end loaded the consolidation with tax increases, which at a time when household spending is being squeezed by relatively high inflation and depressed wages, is self evidently going to harm demand quite a bit.
But everything has to be paid for somehow or other and the idea that you can keep putting off the moment of truth until things get better, at which point the government will willingly do the necessary, is just fantasy. There is always some excuse for not cutting spending. Right now, UK government spending accounts for close to half of GDP. That cannot be a sustainable or even desirable state of affairs.
Prof Krugman says that if you look at bond yields, which in the UK and the US are at historic lows, the markets are positively begging governments to borrow to spend. It would be almost criminal to turn down such an offer. Really? Is it not more to do with the fact that countries still regarded as remotely credit worthy are being treated as a safehaven for international money?
The reason why the German government was last week able to sell a two year bond on a zero coupon is not because markets are saying “borrow, borrow”, but because they are looking for places where there is at least some possibility of getting their money back. Gilts are trading on record low yields because international money is fleeing the eurozone. In such circumstances, the gilts market hardly needs the support of the Bank of England – there are quite enough buyers out there already.
Modesty is not one of Krugman’s virtues. People say “you think everyone who disagrees with you is a mendacious idiot”, he told the Today programme. “No, actually only the ones who are”, he went on. This at least had the merit of being quite funny, so perhaps he should re-invent himself as a standup comedian. This would be a better use of his talents than constantly urging us to engage in more of what brought us to this pretty pass in the first place. Let’s borrow our way out of debt – whoever heard of a sillier oxymoron?
Categories: News mix