Paul Krugman – The new voodoo

Every time I think we might be making progress against the prejudices and myths that pass for judicious thinking these days, something like this editorial in the FT comes along to renew my despair.

The editorial is a response to the latest bad UK economic news, which it says offers no reason at all to reconsider austerity policies. Here’s the substantive argument, in full:

Ed Miliband, the leader of the opposition, predictably used the figures to attack the coalition for “cutting too far, too fast”. But this is unconvincing. There is no guarantee that under a more expansionary fiscal policy the British economy would be doing significantly better. And set against this is the risk that the UK’s low borrowing cost might rise.

This is really extraordinary, if you think about it for a minute.

It’s true that there is “no guarantee” that Britain would be going better with less austerity; nothing is life is guaranteed. Hey, my cup of coffee might suddenly turn into a block of ice — thermodynamics is just statistical, you know. But there is now overwhelming evidence (pdf) that contractionary fiscal policy is contractionary; not least from the results of austerity in Europe:

Somehow, though, the FT feels able to reject this evidence based on .. what?

Then there’s the assertion that bond yields might rise. Well, sure, and there might be a flu outbreak or whatever. But nothing in recent experience suggests that countries with their own currencies are at risk from an attack by bond vigilantes — Japan’s 10-year rate, after more than a decade of warnings that the bond crisis was coming any day now, is 0.91 percent.

Furthermore, eminently respectable economists now argue persuasively that austerity in a deeply depressed economy may well be self-defeating, so that backing off such austerity should encourage, not worry, bond investors.

So the FT’s argument boils down to the assertion that Britain must stay the course lest it be forsaken by the confidence fairy and attacked by misguided invisible bond vigilantes.

And whoever wrote that imagines himself to be sensible and judicious.

Source : New York Times, April 26, 2012

Paul Krugman - New York Times Blog

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