Sorry Krugman, Deficit Reduction Worked in Europe

Paul Krugman has never been shy about denouncing Britain’s attempt at deficit reduction.

In 2012 he called it a “stunning failure of policy” and accused Prime Minister David Cameron of “willful amnesia” for failing to grasp Keynesian economics.

Later that same year Krugman giddily declared that the “confidence fairy died.” The “fairy” was Krugman’s attempt to infantilize the economic idea that balancing the government’s budget in order to restore economic confidence was a more sustainable long-term cure to a depressed economy than more government spending.

As David Cameron said of the concept, “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong. You cannot put off the first in order to promote the second.”

Krugman chalked this up to pure political spin. “[The Cameron government] cannot change course, because to do so would be to admit its mistake,” he writes. “But there is a reason, of course: the ambition and vanity of politicians.”

It apparently infuriated Krugman that these “zombie economic policies” continued “shambling along” in the face of slumping economies. “[I]t’s anyone’s guess when this reign of terror will end,” he lamented.

But in late 2013 professor Krugman’s thesis began to run into some serious trouble. In the face of “austerity” (read: deficit reduction measures) Britain’s economy began growing again. Nevertheless, the growth was nascent and a trend hadn’t been established, allowing Krugman to whip out one last demeaning metaphor for Britain’s conservative government

“There’s a scene in one of the Three Stooges movies – if any readers know which one, please let me know – in which we see Curly banging his head repeatedly against a wall. Moe asks why he’s doing that, and Curly says, ‘Because it feels so good when I stop.’

. . . As Antonio Fatas points out, austerians are now claiming vindication because some of the countries that imposed austerity are – after years of economic contraction – finally starting to show a bit of growth.”

A “bit of growth” may be understating things a bit. The UK economy grew at a 3.1 percent annual rate in the first quarter of the year, employment rates are near record highs, and activity rates (the number of people in the workforce) are at levels not seen in decades. Moreover, the growth appears to be broad based and sustainable with growth occurring in construction, industrial output and services.

All told, Britain’s economy grew at a faster rate than any of the G7 countries in the first quarter, which, it is worthwhile to note, includes the U.S., whose economy coincidentally shrank during that period.

So what is Krugman to say now? Given the countless articles he has spent lambasting the deficit reduction measures of the Cameron government, he surely will devote equal time to explaining his mistake. Of course not, instead we’re left with this paragraph:

Finally, Britain is growing much faster right now than I expected. Fundamental model flaw? I don’t think so. As Simon Wren-Lewis has pointed out repeatedly, the Cameron government essentially stopped tightening fiscal policy before the upturn, which means in effect that the “x” in my equation didn’t do what I thought it would. On top of that, there was a drop in private savings, which is one of those things that happens now and then. The point is that the deviation of British growth from what a standard Keynesian model would have predicted, while real, wasn’t out of line with the normal range of variation-due-to-stuff-happening; nothing there that warranted a major revision of framework.

In other words, his model was right all along if you just take into account all the data that his model doesn’t include. Ah, to be a liberal economist.