Fri, May 10, 2013 - Page 9 News List

Krugman’s call to arms against austerity

In an interview with Paul Krugman, whose latest book roundly attacks the ‘delusional’ deficit-reduction strategy, the Nobel prize-winning economist says austerity policies are misguided

By Phillip Inman  /  The Guardian, LONDON

Robert Shapiro, undersecretary of commerce for economic affairs in former US president Bill Clinton’s second government, says Krugman has failed to win over many policymakers because he ignores concerns about the return of a housing bubble and the failure to tackle Wall Street’s power. Voters are reluctant to hand power back to governments that led them into the financial crisis, even when it is not solely the politicians’ fault.

“It is not irrational that support for government and government solutions has been badly damaged. Governments failed to see the crash coming along with everyone else. So small government is seductive to people,” Shapiro says.

Shapiro backs the argument for a government spending boost, but urges Krugman to engage with concerns about what happens to that money.

“Some people say a fiscal stimulus will create a new housing bubble, but there haven’t been many houses built in the last five years. They say workers have out-of-date skills, but history tells us that if you create jobs, people will fill them,” Krugman says.

Are central banks helping?

“I wouldn’t say that quantitative easing [QE] has been decisive. It is a fragile and fairly weak tool, so to ask it to override fiscal austerity is asking too much,” he says.

However, he wants more QE and is relaxed about inflation at 4 percent or 5 percent.

Maybe the simplicity of his message is driven by daily bouts with Tea Party representatives and Republicans on his blog, and straight jabs from austerians on TV talk shows and radio phone-ins.

Recently he went head to head with David Stockman, former US president Ronald Reagan’s budget director.

Stockman said much of the US$1.6 trillion spent by the US Federal Reserve as part of its QE policy was swallowed by Wall Street and pointed to JP Morgan, which made record profits last year. Reluctant to defend profits made by banks using QE funds, Krugman accused his rival of using “context and model-free numbers embedded in a rant.”

Those who argue that extra government spending could prove as beneficial as in the 1930s still want a little circumspection.

Krugman refuses to play ball.

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