Last night, Nobel Laureate Paul Krugman was a guest of Jeremy Paxman on the BBC’s Newsnight. He remained in his seat throughout the program and debated on three different economic news stories, Greece, Spain, and the UK. [To watch the programme click here]
Paul Krugman was joined by Andrea Leadsom, a Conservative MP, and Jon Moulton, a venture capitalist, for the final debate on the state of the UK economy. Somewhat predictably, Krugman argued his case from a neo-Keynesian viewpoint, more state spending to stimulate the economy, while Andrea Leadsom and Jon Mouton, equally predictably, argued the small state and austerity viewpoint. It was clear, though, that whereas Krugman was applying a non-ideological solution to the particular problems the UK faces now, Leadsom and Moulton were arguing a viewpoint informed by their own ideological prejudice which supported the current policies of the UK Government. [For my own views on ideology click here]
But I couldn’t help wondering if the question that all parties were trying to address wasn’t framed incorrectly. The UK economy can not be taken in isolation from what is happening in the Eurozone economy and the world as a whole. If it could be taken in isolation, then Paul Krugman would be absolutely correct, borrow, employ, and stimulate growth but as it can’t, and wider political considerations must be taken into account, I believe he is wrong. This doesn’t mean that Mrs Leadsom and Mr Moulton are right, because their ideological position is inflexible, they are unlikely to concede that Paul Krugman could be right if the situation in the world, Eurozone, and the UK changes but they are right, in my view, to support the current UK economic policy for now, even if their reasons for doing so are deeply flawed.
This needs some explanation. The global economy is precipitously unbalanced on a number of fronts and, in my view, there can be no sustainable recovery until these huge imbalances have been corrected. Those imbalances are not restricted to the Eurozone but are far wider and fundamental but the imbalances in the Eurozone pinpoint southern Europe as the weakest link most likely to break first.
When the coalition came into power there was a real danger that the UK, because of it’s unprecedented levels of personal, business, and government debt, it’s over-reliance on the financial industry, and it’s structural deficit might have found itself nearer the centre of the inevitable economic storm which is yet to break. By taking the position that they have, the coalition have successfully distanced the UK from the heart of the problem and in doing so they have been able to give the appearance that the UK can be part of any solution rather than part of the problem. That will not insulate the UK from the contagion that the inevitable correction will cause but it is a significant political achievement, and it should be recognised as such and that ‘political’ achievement could not have happened if the government had taken Krugman’s purely ‘economic’ advice, advice that would not have avoided the global economic correction and the contagion but only thrust the UK nearer the firing line.
That said, there will have to be huge economic corrections and this will change both the political and economic landscape irrevocably. Once these corrections have taken place the political considerations will have to take a backseat and the economic considerations, which Krugman is expert in, will come to the forefront. Under these circumstances the ideological viewpoint of people like Andrea Leadsom MP and Jon Moulton become very dangerous, especially if they mistakenly believe that they have somehow been vindicated by their previous position.
There can be no ideologically based economic solution and I believe there must come a time when the coalition will have to adopt a neo-Keynesian approach to policy, just not now.