It’s the politics, stupid.

You won’t see much about it in most of the Tory press, but rarely has the visit of an American economist changed the terms of political debate as much as that of the Nobel Prize for Economics winner Paul Krugman last week (in the UK to promote his new book, ‘End This Depression Now!’).

His appearance on Newsnight, when he exposed the economic stupidity and political crassness of two Tory opponents, has become the talk of the town and a mild antidote to Jubilee fever.

His basic arguments, and the authority with which he delivers them, should fill progressives with hope and confidence – because their gut instincts are right.  So what’s his case?

First, he points out that society is not like a household, despite the attraction of the metaphor.  When a household incurs too much debt, indeed it has to cut back on its spending.  But when society as a whole incurs too much debt, private and public, cutting back on spending makes things worse not better, because we owe the money to each other: your spending is my income and my spending is your income.  If we both cut spending at the same time, we both lose income and, crucially, neither of us cuts our debt.  Even if you have a large public deficit problem – and ours was caused by the cost of bailing out the banks and no other reason – slashing state spending at the same time as the private sector is cutting back simply increases the risk of depression.

Secondly, the reason the government here is slashing public investment, despite the fact that it can borrow at historically low interest rates, is nothing to do with economics and everything to do with politics.  Krugman notes that when ‘austerians’ are pushed, they always revert to saying ‘we have to shrink the size of the state’.  He points out he’d rather weather the storm as big state Sweden than low tax Ireland.  Ultimately, the Tories in Britain are following the lead of the Republicans in America: using deficit panic as an excuse to dismantle social programs and cut taxes for the rich.  There is insufficient demand and there are huge unemployed resources – labour and capital – and they must be put to work by whichever is willing: the state and/or the private sector.

Investing in housing is one of the more obvious ways of doing this, as we have argued here many times before.  But the excitement, at least amongst the progressive chattering classes, caused by Krugman’s version of economics made simple, should embolden the Labour front bench.  As the Tories falter politically, more room is being created for progressive arguments.  And, as Krugman says, borrowing from Keynes, the time for austerity is during the next boom not during the current slump.

You can find a list of Paul Krugman’s writing for the New York Times here.

And an excellent Guardian piece about him by Decca Aitkenhead here.

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2 Responses to It’s the politics, stupid.

  1. Monimbo says:

    A very relevant post and in our context Krugman would almost certainly support state-led housing investment. He is also excellent on other issues such as the stupidity of the US arguments for lower taxes for the very rich and for even less regulation of the banks, and the economic craziness of doing nothing to combat climate change. In fact Krugman is exactly the sort of economist we need Ed Miliband to be listening too – and always, as he made clear on Newsnight, he’s very aware of the evidence base for whatever views he is espousing.

    • Stephen Hunt says:

      While I sort of agree with everything that was in the article I am uneasy about political parties jumping on the band wagon as so to speak like the Labour party has with this article because it was Labour over the last thirteen years that has attacked council house building and sold them off to so called not for profit companies of which the poorest people who need these houses have seem their rents increase substantially so yes spend and invest in housing but who in the Uk government will do that, I am a member of the defend council housing group and consequtive governments have attacked and are continuing to sell off our homes needed for the poorest of society.

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