In his latest column in The New York Times the Nobel Prize winner lights out after Paul Ryan, the up and coming Republican leader in the house, who rebutted Barack Obama's State of the Union address.
He quotes Ryan as saying that government refusal to cut runaway spending was at the heart of the European malaise.
“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.”
But Krugman says Ryan took exactly the wrong lesson from the Irish experience.
Krugman writes "On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation’s Index of Economic Freedom ranked it above every other Western nation.
"In 2006, George Osborne, now Britain’s chancellor of the Exchequer, declared Ireland “a shining example of the art of the possible in long-term economic policy making.” And the truth was that in 2006-2007 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.
"So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.
Krugman believes the lesson of Ireland have noting to do with the need for harsh cuts and much more to do with lack of oversight of banks
"The lesson of the Irish debacle, then, is very nearly the opposite of what Mr. Ryan would have us believe. It doesn’t say “cut spending now, or bad things will happen”; it says that balanced budgets won’t protect you from crisis if you don’t effectively regulate your banks — a point made in the newly released report of the Financial Crisis Inquiry Commission, which concludes that “30 years of deregulation and reliance on self-regulation” helped create our own catastrophe. Have I mentioned that Republicans are doing everything they can to undermine financial reform?"
He also points out that harsh cuts in Britain since the Tories came to power have resulted in negative economic growth in the last quarter---the same kind of policies he says Ryan and others are trying to bring in here ?
Who is right in this argument?
On the face of it it is difficlt to disagree with Krugman, draconian cuts do not lead to growth.