http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion
I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere. George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world. The press seizes on Ed Miliband’s failure to mention the budget deficit in a speech as a huge gaffe, a supposed revelation of irresponsibility; meanwhile, Hillary Clinton is talking, seriously, not about budget deficits but about the “fun deficit” facing America’s children.
Is there some good reason why deficit obsession should still rule in Britain, even as it fades away everywhere else? No. This country is not different. The economics of austerity are the same – and the intellectual case as bankrupt – in Britain as everywhere else.
A rather long Krugman piece about austerity and british politics.
I'm not done yet but it's good so far.
I did read the whole article. Like all of Krugman's work it is correct but also frustrating. Krugman has all of the pieces but stubbornly refuses to put them together, to close the loop.
Yes, austerity is a stunningly stupid thing to do in the middle of a recession. We knew that before the recession, we knew that when it was being proposed and we know that now. We only had to look at the people who were proposing it and the rather transparent reason that they did, to sacrifice the recovery from the massive recession that they caused in order to beat back yet another small part of the New Deal to take the government another small step closer to being an entity that devotes all of its efforts to benefiting the wealthy exclusively.
What Krugman still doesn't get, where he still is imprisoned by his neoclassical synthesis training, is that the debt of a sovereign nation's government is that nation's private sector savings. As such it can never be paid off in any meaningful way, that to do so will, as it always has before, cause a massive recession, a depression.
And he doesn't get that a nation that runs a trade deficit must run a government budget deficit or the result will be a massive run up in private debt, that is a reduction in private savings. Leading eventually to instability from debt deflation, when private sector stops borrowing, causing a massive recession.
When the government runs a budget deficit they are putting money into the real or physical economy of the 99%. The economy that produces products needed for consumption. Bank money created by the economy itself when people borrow money from the banks is the other way that money is created and put into the real economy.
When the economy runs a trade deficit, when they buy more from other countries than they sell to other countries, money is leaving the real economy. If the government doesn't spend that amount of money into the real economy through deficit spending then private debt is going to build to replace the money going to other countries.
Bank money that is spent in the real economy helps the economy grow. The only negative to the economy is the interest on the debt, more money has to be paid back than was created. But Bank money created from private debt taken out to buy from other countries stimulates their economy. The entire amount of the debt its lost to the economy, the entire debt is a negative to the economy, not just the interest. Private debt then builds rapidly, putting the economy on the way to debt deflation and recession.
The mistake is in viewing the national debt in the same way that we view our personal or business debt, as a burden that has to be paid off. This is an area where common sense based on ignorance fails completely. Resulting in the wrong policies like austerity being applied. But even Krugman eventually fails in this regard, when he calls for paying down the debt in good times (and his belief that monetary policy is sufficient when we aren't at the zero bound, and his misunderstanding of the role of capital and investment, and many more things that few here want to hear...)
