About the Author
Paul Krugman joined The New York Times in 1999 as an Op-Ed columnist and continues as a professor of economics and international affairs at Princeton University. Mr. Krugman received his B.A. from Yale University in 1974 and his Ph.D. from M.I.T. in 1977. He has taught at Yale, M.I.T. and Stanford. At M.I.T. he became the Ford International Professor of Economics.
Mr. Krugman is the author or editor of 27 books and more than 200 papers in professional journals and edited volumes. His professional reputation rests largely on work in international trade and finance; he is one of the founders of the “new trade theory,” a major rethinking of the theory of international trade. In recognition of that work, in 1991 the American Economic Association awarded him its John Bates Clark medal. Mr. Krugman’s current academic research is focused on economic and currency crises.
2010: Myths of Austerity (I have edited the following articles to suit the UK situation but in essence they remain intact)
When I was young and naïve, I believed that important people took positions based on careful consideration of the options. Now I know better. Much of what serious people believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions.
For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.
This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the rich elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible Hedge Fund vigilante and the confidence fairy.
Hedge Fund vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts. Now there’s no question that countries can suffer crises of confidence. But what the advocates of austerity claim is that;
(a) Hedge Fund vigilantes are about to attack the UK.
(b) Spending anything on financial stimulus will set them off.
What reason do we have to believe that any of this is true? Yes, the UK has long-run budget problems, but what we do on stimulus over the next few years has almost no bearing on our ability to deal with these long-run problems. “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.”
Nonetheless, every few months we’re told that the Hedge Fund vigilantes have arrived, and we must impose austerity now now now to appease them. Three months ago, a slight upturn in long-term interest rates was greeted with near hysteria: “debt fears send rates up,” was the headline in the The London Financial Market’s, although there was no actual evidence of such fears, and financial experts later pronounced the rise a “canary in the coal-mine.”
Since then, long-term rates have plunged again. Far from fleeing UK government debt, investors evidently see it as their safest bet in a stumbling economy. Yet the advocates of austerity still assure us that Hedge Fund vigilantes will attack any day now if we don’t slash spending immediately.
What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as can be certain, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, (such as an increased National Debt from £500 billion to £1.7 Trillion). Another example is Ireland: Ireland’s era of austerity-with-growth in the 1980s depended on a drastic move from trade deficit to trade surplus, which isn’t a strategy everyone can pursue at the same time.
And current examples of austerity are anything but encouraging. Ireland has been a good soldier in this crisis, grimly implementing savage spending cuts. Its reward has been a Depression-level slump — and financial markets continue to treat it as a serious default risk. Other good soldiers, like Latvia and Estonia, have done even worse — and all three nations have, believe it or not, had worse slumps in output and employment than Iceland, which was forced by the sheer scale of its financial crisis to adopt less orthodox policies.
So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to analysise their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.
2012: Cameron’s Remarkable Achievement – UK Office For National Stistics – Economic Review – April 2012 http://www.ons.gov.uk/ons/dcp171766_263951.pdf
When David Cameron became Prime Minister, and announced his austerity plans — buying completely into both the confidence fairy and the Hedge Fund vigilantes — there were many plaudits. Cameron and Osborne were the toast of very serious people everywhere.
In the years that followed Britain has suffered the brutality of a double-dip recession, and has achieved the remarkable feat of doing worse this time around than it did in the Depression of the 1930s.
Britain is also unique in having chosen to implement an “Austerity Programme” freely, facing neither pressure from Hedge Fund markets nor conditions imposed by the EU.
Now, the defense I hear from Cameron apologists is that the austerity mostly hasn’t even hit yet. But that’s really not much of a defense. Remember, the austerity was supposed to work by inspiring confidence: where’s the confidence? Basically, the expansionary aspect should already have kicked in: But it’s all contraction and accompanying austerity from 2010 -2025 and beyond. Needless to say, Cameron and Osborne are insistent that they will not change course, which means that Britain will continue on a death spiral of self-defeating austerity.
2015: The Big Wrong
Austerity measures forced on the UK by the Con/Dem coalition government (fully supported by the Labour Party) have raised public consciousness in a way literally years of economic data couldn’t. The austerity doctrine that has ruled UK policy in the period 2010-2015 has been a big fat failure.
It’s important to understand that what has occurred isn’t a failure of orthodox economics. The Keynesian approach. That is, economics based on what the finance profession has learned over many generations, and for that matter contained in most textbooks — wasn’t adopted by the Con/Dem Government. The austerity thing was simply invented out of thin air and a few dubious historical examples serving the prejudices of the “rich elite”. And now after 5 years the results are clear: Keynesians have been completely right, Austerians utterly wrong — at a terrible human cost.
Acceptance of the foregoing should really be enough for the future UK government to change their fiscal policy in favour of the Keynesian approach advanced by Nicola Sturgeon, First minister of the Scottish Government, now that it is known that the ideas behind the “Austerity Policy” were all wrong.
Wishful thinking! Not if SNP MP’s, in large numbers, are returned to Westminster on 8 May 2015. Their presence, in support of a Labour Government will do much to persuade ED Balls that whilst Austerian ideas clearly have an emotional and political appeal they are not resilient to the evidence stacked against them. http://krugman.blogs.nytimes.com//2012/04/25/camerons-remarkable-achievement/