This country is relying too heavily on pre-crisis policy ideas that have since been disproved.
Esteemed economist Paul Krugman has called for an evidence-based analysis of the country’s economic problems and a change in public thinking.
He believes the flawed, outdated ideas of the 2000s are being recycled and wrongly supporting austere fiscal policies in many countries.
Krugman writes in the FT:
More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s.
The reason is simple: we are relying on the same ideas that governed policy during that decade.
Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions – such as Greece – this is false. Instead, the conditions for the crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks.
Today’s government deficits are a consequence of the crisis, not a cause.
Once property bubbles burst in the US and Europe, the private sector halted its spending in an attempt to reduce its debts. However, this had a devastating knock-on effect, as “one person’s spending is another person’s income” and the spending collapse has triggered an economic depression.
• Krugman: Coalition is “bleeding” Britain dry 1 Dec 2011
Krugman explains what the government’s response now should be:
At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilising force, attempting to sustain spending. At the very least, we should not be making things worse with big cuts in government spending or big increases in tax rates on ordinary people.