Americans wouldn’t normally pay much attention to a British budget. We have enough budget issues of our own! But when the British Finance Chief unveiled his public spending plans today, at least one prominent American economist must have been watching closely.
Paul Krugman -- Nobel-prizewinning Professor of Economics at Princeton University -- is a keen student of the British economy. And a stern critic of the way it’s been managed. In Krugman's best selling book, End This Depression Now, he argues that Europeans -- including the Brits -- are obsessed with austerity. And that they’re driving their economies into a death spiral … cutting public spending when they should be doing the opposite and boosting growth.
"The British economy, like the U.S. economy, needs to push public investment back up," says Krugman.
"It needs to spend more because this is a special time. This is a once-in-a-three-generations economic crisis. And it’s not a time to be penny-pinching."
Krugman argues that what the Brits have been doing to cut their debt is completely counterproductive. He says that austerity shrinks the economy, reducing tax revenues and increasing government debt. The British government should borrow more to spend more, to spark up the economy.
British Finance Minister Matthew Hancock dismisses that as nonsensical:
"We have a massive borrowing problem. We have overleveraged banks and they’re a drag on the economy. And the argument that you can borrow your way out of debt doesn’t make sense," claims Hancock.
The government and its supporters concede that the deficit reduction plan has hit a sticky patch. They admit that growth has faltered. But they deny that has anything to do with austerity. They blame the recession in the eurozone for weakening Britain’s main export market.
This is not just some academic spat about far-off economies on the other side of the Pond. With the U.S. sequester, this issue may soon come home to roost in America.
Philip Booth of the Institute of Economic Affair says the omens are good. He feels that the U.S., with its flexible economy, may weather the coming austerity better than the Brits.
“You’d expect the U.S. economy to respond pretty well when the government reduces its spending, so that private sector jobs and private sector growth replaced public sector activity pretty quickly,” says Booth.
Paul Krugman may not reach the same conclusion if austerity takes hold in own backyard.