Regular readers will know that I have a track record of bashing arch-Keynesian provocateur Paul Krugman. But my views on Krugman — as well as Keynesian thought in general — are complex. For a start, I think his work on economic geography is excellent, and I rather wish he could take it to the same logical conclusions that I do.
In a way, he reminds me of Karl Marx. Marx’s exhaustive studies of 19th century capitalism are fascinating and essential reading. But Marx’s proposals for the global economy were ineffectual, just as Krugman’s solution to today’s economic malaise — throwing more money at the problem — is quite superficial. Plus, as a polemicist, he has been guilty of some raging hyperbole. But so have I.
Now, admitting that austerity is a problem has been quite difficult for me. Most of my political impulses are libertarian, and I see the accumulation of state power and an expansive state role in the economy as deeply problematic, mostly due to the problem of capital misallocation. But is a time of severe economic recession and weakened confidence really the appropriate time to cut spending, and throw welfare recipients – many of whom are elderly or disabled — into the blender? I’d love to see less state involvement in the economy, and I think there are a good deal of wasteful programs — e.g. overseas military adventurism — that can be cut right now in the name of paying down debt and improving infrastructure.
But the time to really cut is when the economy has significantly rebounded: when the private sector is creating jobs, when confidence is higher, when tax revenues have rebounded.
Krugman’s criticisms of Cameron have been rather different to mine: his line has been that cutting spending in a demand-depressed economy will just lead to lower demand. I take a slightly more qualified line.
The real problem here is that cuts in today’s environment are contractionary. That’s because of the debt. A high debt load means that service cuts are not offset with tax cuts. The money saved just goes toward balancing the budget, and not back out into the real economy where it can be used to create jobs and growth. The correct time for Cameron’s policies was during the last boom — when the economy is naturally at high steam, and is creating lots of jobs and growth. The best future period for these policies will be the next boom. Now, the argument Cameron might use is that there won’t be a “next boom” unless we take drastic action to reduce debt. Britain already has a huge total-debt-to-GDP ratio; we can ill afford another credit-financed boom. But austerity doesn’t even seem to be much use at reducing deficits: in a depressed economy, as government-spending falls tax revenue also seems to fall.
Back in June 2010, when George Osborne unveiled the Cameron government’s austerity plan, it was all about confidence.
So how’s it going?
The Cameron government likes to point to low British interest rates — which are not just the result of safe-haven flight into the bonds of every advanced-country government that still has its own currency. Except, actually they are:
Still, the government’s commitment to fiscal responsibility has led to rising consumer confidence. Or, actually, not:
Business confidence! That’s the ticket! Or, well, no:
Will Osborne and Cameron listen to the raw empirical data that suggests very strongly that their policies are not working? Or will they drive onward on the strength of their ideological fervour?