The current state of the economy is like the 1930s, says Professor Colin Thain of POLSIS. We should support Nobel laureate Paul Krugman’s new ‘economic manifesto’ and demand a change of direction in UK and Western economic policymaking.
Paul Krugman’s ‘Manifesto for Economic Sense’ has been signed by a huge range of economists and political economists around the world, including: Charles Wyplosz – The Graduate Institute, Geneva, Chris Pissarides – London School of Economics and Political Science, Christopher Allsopp – Director, Oxford Institute for Energy Studies, Oxford, David Blanchflower - Dartmouth College, David Soskice – University of Oxford, Jeffrey Frankel - Harvard University, Jonathan Portes – National Institute of Economic and Social Research, Richard Layard – LSE Centre for Economic Performance, Richard Parker – Harvard University, Robert Skidelsky - Warwick University and Simon Wren-Lewis – Oxford University.
The manifesto argues that
‘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. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response. These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems’.
This analysis includes 3 key assertions that (1) ‘the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause’; (2) ‘at a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that’s exactly what many governments are now doing’; and crucially (3) ‘conventional policy wisdom took a wrong turn – focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing the dampening effects of private-sector spending cuts’.
It is time therefore to prioritise the reduction of ‘unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult’.