Wednesday, October 27, 2010

Krugman on austerity

Another day, another Question Time in which Bill English tries to pretend that the fact that New Zealanders have no money is a good thing, and pushes for further cuts to avoid debt. Meanwhile, in the New York Times, Nobel prize-winner Paul Krugman has been attacking this austerity logic. He's writing about the US and the UK, but he might as well be writing about us:

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.


What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Krugman points out that increased government spending is the solution to this sort of recession, even when it requires more borrowing. Our government is sadly doing exactly the wrong thing. And we only have to look over the Tasman (where the government spent up large and avoided both recession and unemployment) to see that.