For several years, and often several times a month, the Nobel laureate economist and New York Times columnist and blogger Paul Krugman has delivered one main message to his loyal readers: deficit-cutting “austerians”, as he calls advocates of fiscal austerity, are deluded. Fiscal retrenchment amid weak private demand would lead to chronically high unemployment. Indeed, deficit cuts would court a reprise of 1937, when Franklin D Roosevelt prematurely reduced the New Deal stimulus and thereby threw the US back into recession.
Well, Congress and the White House did indeed play the austerian card from mid-2011 onward. The federal budget deficit declined from 8.4% of GDP in 2011 to a predicted 2.9% of GDP for 2014. According to the International Monetary Fund, the structural deficit – sometimes called the “full-employment deficit”, and a measure of fiscal stimulus – fell from 7.8% of potential GDP to 4% from 2011 to 2014.
Krugman has vigorously protested that deficit reduction has prolonged and even intensified what he repeatedly calls a “depression”, or sometimes a “low-grade depression”. Only fools like the UK’s leaders, who reminded him of the Three Stooges, could believe otherwise.
Yet, rather than a new recession or an ongoing depression, the US unemployment rate fell from 8.6% in November 2011 to 5.8% in November 2014. Real economic growth in 2011 stood at 1.6%, and the IMF expects it to be 2.2% for 2014 as a whole. GDP in the third quarter of 2014 grew at a vigorous 5% annual rate, suggesting that aggregate growth for all of 2015 will be above 3%.
So much for Krugman’s predictions. Not one of his New York Times commentaries in the first half of 2013, when “austerian” deficit-cutting was taking effect, forecast a major reduction in unemployment or that economic growth would recover to brisk rates. On the contrary, “the disastrous turn toward austerity has destroyed millions of jobs and ruined many lives,” he argued, with the US Congress exposing citizens to “the imminent threat of severe economic damage from short-term spending cuts”.