I have just been reading Paul Krugman’s long read in the Guardian entitled “The austerity delusion.” I would like to say I disagree with him, because he is saying we should run government deficits – in other words allow governments to borrow – to get out of economic recessions and my whole blog is about stopping people and governments from borrowing. But I cannot disagree with what he says – the main politicians are saying something to get our votes that just does not make sense.
I will say I disagree with the idea of running government deficits and refer you back to the white paper. And give one main reason here. During his article Paul Krugman says
It’s true that you can’t run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it’s foolish and destructive to worry about deficits when borrowing is very cheap and the funds you borrow would otherwise go to waste.
At some point you do want to reverse stimulus. But you don’t want to do it too soon – specifically, you don’t want to remove fiscal support as long as pedal-to-the-metal monetary policy is still insufficient. Instead, you want to wait until there can be a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. As John Maynard Keynes wrote in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.”
In my view this actually creates a “boom and bust” effect. You borrow and stimulate the economy and help produce a boom and then you have to reduce borrowings – which stifles the economy and produces a recession.
But back to where we agree. George Osborne has been claiming that his austerity measures have been the thing that saved our economy when our George actually borrowed as much as the previous Labour government. Yes, he introduced fiscal tightening but he has not kept it up.
10 year interest rates at 14 April 2015
But for some reason which Paul Krugman tries to explain we Brits seem to think that austerity is a good thing. So the Labour line and the LibDem line is that we need to be cautious about spending (to differing degrees) and it is only the SNP who want to spend a lot more.
So all our main politicians seem to be ignoring general economic wisdom despite the wealth of economic evidence from the rest of the western world (except Greece). And they are ignoring the successful growth policies adopted in these other countries in favour of a theory that seemed good in 2010 but has since been shown to be wrong.
But we don’t have much choice – if we want our votes to count we will almost certainly have to vote for a party that will give us austerity even though it makes no economic sense.