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16 August 2012

Paul Krugman and the economists who called it right

Don't forget those who warned of a double-dip as early as 2009.

By George Eaton

Paul Krugman, whose new book End This Depression Now! (reviewed by Will Hutton for the NS) should be at the top of everyone’s summer reading list, has picked up on this week’s NS cover story on how Osborne’s supporters have turned against him. On his New York Times blog, he writes:

Good on them [the economists]. I was, however, disappointed to see so many of the prodigal economists asserting that they were responding to changed circumstances rather than admitting that they simply got it wrong.

For circumstances really haven’t changed; the UK had a depressed economy then, and it still does now. Fiscal austerity while the economy is depressed, and in particular when conventional monetary policy has reached its limits, was an obviously bad idea from day one. Not to put too fine a point on it, what I was writing about austerity back in 2010 looks just fine a couple of years later.

The fact of the matter is that the austerians chose to throw basic macroeconomics out the window. And that, not failure to anticipate negative surprises, is where they went wrong.

Another Cassandra was our economics editor, David Blanchflower, who was warning of the risk of a double-dip recession as early as October 2009:

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Lesson number one in a deep recession is you don’t cut public spending until you are into the boom phase. John Maynard Keynes taught us that. The euro area appears to be heading back into recession and the austerity measures being introduced in certain eurozone countries, especially those in Germany, will inevitably lower UK growth, too. It is extremely unlikely, therefore, that net trade will leap to our rescue. taught us that. The consequence of cutting too soon is that you drive the economy into a depression, with the attendant threats of rapidly rising unemployment, social disorder, rising poverty, falling living standards and even soup kitchens.

In the wake of Osborne’s “emergency” Budget in June 2010, he wrote:

I am now convinced that as a result of this reckless Budget, the UK will suffer a double-dip recession or worse.

Blanchflower and Krugman are two of the few economists to have emerged from the events of recent years with their reputations enhanced, but one sympathises with Krugman’s recent lament: “I’m sick of being Cassandra. I’d like to win for once”.