Krugman blasts Ed Miliband for the "limpness" of his response to the Conservatives' drive for further austerity. In words that would warm the hearts of those Labour stalwarts who regret the party's failure to challenge the dominant economic narrative, Krugman writes:
Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible – or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-2009.
A long-time critic of Conservative policies, the Keynesian economist writes: "Harsh austerity in depressed economies isn’t necessary and does major damage when it is imposed. That was true of Britain five years ago – and it’s still true today."
He claims during the last General Election Britain was "gripped by austerity fever" and the only people who still buy into the austerity argument, as Krugman defines it, are Britain's coalition government and the British media.
Krugman's explanation for why many in Britain's political and economic life have not fallen into line with his interpretation of the austerity debate is relatively simple - ideology and private interest. He picks out the letter to The Telegraph signed by 100 business leaders at the beginning of the General Election campaign as an example.
The letter was broadly supportive of the government's approach on deficit and tax reduction. Krugman suggests in his article that what he calls the "austerians" use "scare talk" about debt and deficits to hide their real agenda - shrinking the size of the state.
He goes on to cite the Roosevelt Institute's Mike Konczal, who claims "business interests dislike Keynesian economics because it threatens their political bargaining power." Krugman agrees with Konczal that business leaders want the public to imagine the health of economy depends on them and, therefore, requires the government to avoid overly interventionist policies.
Responding to Krugman's piece, editorial and programme director at the Institute of Economic Affairs, Philip Booth, said:
Countries that continued with deficits of that level for a period have not just included crisis countries such as Greece, but have also included countries which have experienced low growth and the huge build-up of debt such as Japan. It is difficult to think of countries that have had budget deficits of around 10 per cent of national income for a long period and met with any degree of success.
Booth added that the UK economy was in much better health than it was five years ago:
Britain has the highest growth rate in the G7 and buoyant employment. Insofar as growth is lower than it should be, it is clear that we have a productivity problem and not a demand crisis. There are areas of British data where Krugman simply seems entirely unaware of the facts. A crucial step in his argument is that: “An economy where interest rates cannot go any lower is an economy awash in desired saving”. It is difficult to imagine how the British savings ratio can go any lower.
Whether this is a nuanced view of the austerity debate and or an elaborately-worded conspiracy theory will matter little to Britain's major parties heading towards polling day.
The Tories view the economy as their trump card and Labour has committed itself to balancing the current budget deficit over the course of the next parliament. Whether Krugman likes it or not, continued austerity is the only game in town when it comes to the UK economy.