Most amateur economists know of some of the theories of Paul Krugman, or at least have heard his name as he is one of the biggest modern day proponents of the currently in vogue Keynesian system of economics. In fact, as one of the doctrine's strongest adherents, he believes that the US government's biggest mistake with stimulus spending was that there wasn't enough of it. Though many believe that Mr. Krugman is now more a political idealist and celebrity newspaper columnist than a research-driven economist, he is no doubt intelligent and has a knack for presenting his ideas in a very clear way that most people can understand. I, for one, would almost certainly never say that I wanted to shut him up.
However, certain pundits across the pond have said just that in response to Krugman's recent thoughts on Britain's austerity measures. Krugman, who was predictably highly critical of the recently elected Conservative party's budget cuts, received a fairly negative response from at least one British columnist, who named a recent article, 'Will someone please shut Krugman up.' Columnist Jeremy Warner defends his critique of Krugman by saying:
'Maybe he’s right. Yet the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels. He accuses the Tories of being “ideological” in their single minded pursuit of deficit reduction, and of using the crisis to dismantle the welfare state, yet he conveniently skirts around the underlying issue, which is in essence that the country can no longer afford this expenditure.'
Unfortunately, Krugman may indeed be correct. And laying off somewhere in the neighborhood of half a million government workers does appear quite the risky gambit when an economy is already in turmoil. However, it is also true that the British can no longer afford their current levels of spending. Therefore, though unfortunate and potentially risky, the cuts have also been seen as a necessary burden by many of the British people. They have certainly rallied together during more difficult times. For the sake of our friends across the Atlantic, let's hope that Mr. Krugman is wrong this time and that responsibility is just what the doctor ordered. Otherwise, a difficult path might have just become a lot harder.
Welfare state don't encourage necessary growth to sustain an economy indefinitely since the populous becomes dependent on handouts and are less inclined to work. Wealthy countries like the UK can become welfare states, but will inevitably decline in wealth due to a decrease in output. The UK can no longer afford it's own military which has provided the nation with security and means to defend and build up it's wealth. There should definitely be a social safety net, but apparently it needs to be reduced in the UK since it appears to be undermining economic growth.
ReplyDeleteMy view is that handouts seem to be a way the current government indirectly pays for votes by increasing eligible recipients.
Hi Matt, thanks for the comment. Completely agree, though I also believe that the timing could be tough. If governments were more responsible when times were good, austerity in times like this might not be necessary.
ReplyDeleteUnfortunately, it is too late for that now, and at this point, cuts are obviously needed (in the UK as well as the US) For example, I noted a few posts ago that the military cuts the Brits are enacting could serve as a model for the US. However, the job cuts are undoubtedly tough for individuals, as well as society, to swallow. And, they aren't free, as both the US and the UK have substantial unemployment benefit schemes.
If nothing else, it will be interesting to see economically how this plays out (though interesting might not be the right term when people's livelihoods are at stake...)
I wholeheartedly disagree with Krugman's theories on government recessionary spending, believe that cuts are necessary and truly want him to be wrong on this point. However, as he notes, the flipside risks remain very strong.
The cuts definitely come at difficult times; however it may be difficult times that make these issues apparent. Warren Buffet said "only when the tide goes out do you discover who's been swiming naked"
ReplyDeleteInteresting to learn from the unfortunate situations, but mistakes have the ability to strengthen the future.