Wednesday, May 15, 2013

Krugman on austerity

Krugman has a readable account on the austerity craze in How the casre for austerity has crumbled? Though hje notes that "It’s also worth noting that while economic policy since the financial crisis looks like a dismal failure by most measures, it hasn’t been so bad for the wealthy. ", but does not mention Kalecki. 
From Aditya Chakrabort's account of Klechi's 1944 paper Political aspects of full employment
"His article, Political Aspects of Full Employment, explains with an almost eery prescience why the coalition is attacking our wages, our working terms and conditions and our welfare state. The tone is exhilaratingly brisk. "A solid majority of economists" agree on how to solve a slump, Kalecki says. The government borrows more and invests the cash either in building schools and hospitals or in providing benefits and tax cuts; this boosts demand and generates employment. Ta-da! Two pages in, and he has both fixed the problem of recessions and despatched most of the arguments against public borrowing that we have heard with such tedious frequency in the past five years.
What if savers become wary of lending to the state? Then, Kalecki says, the Treasury pays higher interest rates – and, since most of its lenders are British (just like now), the money will still flow back into the economy. But he notes that Churchill's war coalition has run "astronomical budget deficits", while "the rate of interest has shown no rise since the beginning of 1940". What if it becomes too costly to keep on top of the national debt? Then ministers should raise more funds, not by taxing ordinary pay or spending, which would slow the economy, but with a levy on idle wealth."

Krugman too notes "But a funny thing happened to other countries with high debt levels, including Japan, the United States, and Britain: despite large deficits and rapidly rising debt, their borrowing costs remained very low. The crucial difference, as the Belgian economist Paul DeGrauwe pointed out, seemed to be whether countries had their own currencies, and borrowed in those currencies. Such countries can’t run out of money because they can print it if needed, and absent the risk of a cash squeeze, advanced nations are evidently able to carry quite high levels of debt without crisis."
P.S. Recessions can hurt, but austerity kills

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