Krugman or Gideon: who’d you trust to get economics right?

It is a simple choice: at a time of the deepest global economic crisis the world has faced, possibly even worse that the Great Depression of the 1930s, whose advice would you take?

Would you trust the judgement of two Nobel Prize-winners, one long dead but whose economic plans and advice were proved to work after helping to lever America out of the Steinbeckian slump 80 years ago and laid the foundations for global post-war recovery, together with his latter day advocate, a professor of economics and foreign affairs at Princeton University?

Or instead, would you rely on two next door neighbours, one the heir to an ancient Anglo-Irish baronetcy, who after attending public school and Oxford folded towels at Selfridge’s before getting a job at Conservative Central Office, and his mate, a descendant of King William IV, an OE and fully paid up member of the Bullingdon Club who went straight into politics after uni and in one of his first jobs helped Norman Lamont create a full-on financial crash in a single afternoon?

It would be hard to have missed Paul Krugman on television or in the newspapers of late. The Princeton professor, after all, has a book to flog.

The book is called End This Depression Now. It is not aimed at psychiatrists nor those suffering work-related stress, although it ought to be recommended reading at No10 and No11 Downing Street. Maybe Gideon Osborne could find a fag to read it to him.

Krugman is an advocate of John Maynard Keynes, the great 20th century British economist whose advice formed the basis of Roosevelt’s New Deal in America and the basis of the post-war economic settlement.

Krugman’s message now is that AUSTERITY. DOESN’T. WORK. Some might say that you do not need to be a Nobel Prize-winner to see that.

If you have not yet encountered Krugman, you are recommended to seek out him, and his book and other writings. This eight-minute clip from BBC Newsnight last week is particularly insightful.

Over the weekend, Krugman, a columnist in the New York Times, wrote this:

“The boom, not the slump, is the right time for austerity.” So declared John Maynard Keynes 75 years ago, and he was right. Even if you have a long-run deficit problem — and who doesn’t? — slashing spending while the economy is deeply depressed is a self-defeating strategy, because it just deepens the depression.

So why is Britain doing exactly what it shouldn’t? Unlike the governments of, say, Spain or California, the British government can borrow freely, at historically low interest rates. So why is that government sharply reducing investment and eliminating hundreds of thousands of public-sector jobs, rather than waiting until the economy is stronger?

Over the past few days, I’ve posed that question to a number of supporters of the government of Prime Minister David Cameron, sometimes in private, sometimes on TV. And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.

The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison?

The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.

So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

This isn’t a new insight. The great American economist Irving Fisher explained it all the way back in 1933, summarizing what he called “debt deflation” with the pithy slogan “the more the debtors pay, the more they owe.” Recent events, above all the austerity death spiral in Europe, have dramatically illustrated the truth of Fisher’s insight.

And there’s a clear moral to this story: When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can’t or won’t. By all means, let’s balance our budget once the economy has recovered — but not now. The boom, not the slump, is the right time for austerity.

What is particularly refreshing about Krugman’s work is not only his clear-sighted vision of the British economy, but also the straightforward manner in which he analyses it.

Not being a party politician with an eye on elections in 2015, nor with apologies to make for 2005-2010, Krugman is able to speak his mind and nail the 400lb gorilla sitting in the living room of No11 Downing Street.

The miner’s strike of 1984-1985 was nothing to do with economic policy, but was an earlier example of spiteful political point-settling

For all the Thatcherite soundbytes about balancing the books in the household scullery, Krugman is not afraid to state clearly that much of what has been done to kill off the nascent recovery of 2009-2010 and create Britain’s double-dip recession has not been done with the economy in mind, but has been dictated by a nasty dogma that is using the global financial crisis as an excuse to slash public service jobs and spending.

It is spiteful, score-settling politics at its worse, last witnessed when a previous Tory government created a state of near-civil war in the coal fields of Britain, just so that Maggie could get one over the miners, and thus laid waste to much of British primary and manufacturing industries.

Thirty years ago, Thatcher was able to hide the long-term harm such policies did to the economy by “selling off the family silver”, according to Harold Macmillan, as public asset after public asset was flogged off on the cheap to pay for tax cuts and the record levels of unemployment. North Sea oil flowed and further disguised the industrial decline.

This time round, the oil is reduced to a trickle and there’s few public assets left for Osborne and Cameron to sell.

Nobel Laureate Professor Paul Krugman stifles a laugh: has he just seen Gideon Osborne’s rough workings for the 2012 Budget?

So the targets today are privatising the NHS to Tory party supporters, abandoning a costed and necessary schools building programme while handing over public education assets to a rag-bag of free school and academy advocates (many of whom are leading Conservative party officials or donors), and raising VAT to a rate which is strangling what is left of British business, while robbing the pension funds of doctors, nurses, teachers and other public servants in a manner that would make Robert Maxwell blush with shame.

How is any of this relevant in Croydon in 2012? Well, the next time you see a shop boarded up on the high street, or a previously viable small business closed down and replaced by a charity shop or bookies, ask yourself why people are doing less shopping since VAT was hiked to 20 per cent.

Or if your child or grandchild cannot get a place at a local primary school next September, ponder why the schools necessary to provide an adequate number of places have not been built since 2010.

And when the ConDem coalition closes the maternity unit and A&E at St Helier Hospital, and ambulances are forced to speed to Mayday or St George’s instead, and the first life is lost as “dead on arrival” as a result, ask again whether cutting public spending is always the right thing to do for the economy.

Krugman has rumbled this. He draws comparisons to the United States, where punishing the poor to reward the rich is in some parts viewed to be a constitutional right, alongside that of bearing arms. There are a couple of key passages as he concludes his NYT article:

… The austerity drive in Britain isn’t really about debt and deficits at all; it’s about using deficit panic as an excuse to dismantle social programs…

The big question here is whether the evident failure of austerity to produce an economic recovery will lead to a “Plan B.” Maybe. But my guess is that even if such a plan is announced, it won’t amount to much. For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it. And it still is.

  • To read Krugman’s article in full, and find links to his other work, click here.
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2 Responses to Krugman or Gideon: who’d you trust to get economics right?

  1. Krugman, no doubt.
    The Estonian example is an amoral aberration. The government is obsessed with creating private enterprises selling/producing all things unnecessary.
    We need to change our way of life and look at everything (banking first of all) in a different way.
    We need to consume less not more.
    We incinerate our waste (and make the likes of Viridor richer) instead of stopping consumption.
    How long can we afford to do that for? Krugman is right when he says that borrowing is a venal sin whilst betraying our future generations and robbing them of hope is the real crime.

  2. Klugman is absolutely right here. The austerity programmes hurt the poorest elements of our society.

    However, here in Britain and many western nations, the levels of waste within the public sector could and should be addressed. Why not cut salaries of the highest earners like GPs, who are vastly overpaid in relation to their capabilities. Save money at the top not the bottom. If the highest earners were to take a reduction of twenty percent of salary then we could make significant savings.

    We need to stop pointless roadbuilding projects, such as traffic calming, road narrowing, trams systems et al that make congestion far far worse, disable our transport systems, and make it impossible for people to work or get to work efficiently. Cut business rates completely for new start up ventures, add incentives for people to employ new staff, and crucially stop the commercial property sector from nefariously stealing every penny profit from productive business.

    We have developed into a parasitic economy and unless these issues are resolved, we will simply spiral into more debt and eventually bankruptcy. We need a plan to generate wealth, particularly at the bottom. The bottom 70% of our population earn less than £17000 per annum. Along with real unemployment, including the economically inactive standing at plus 8 million, they can no longer afford to subsidise the tax dodging rich.

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