Cameron Defending Austerity

      Krugman lists three defenses for British austerity:

       "1. Austerity works! Look at our low, low rates!"

       "2. Austerity? What austerity?"

        "3. Anyway, America does it too."

          http://krugman.blogs.nytimes.com/2012/05/27/austerity-defenses/

          Krugman:

          "So, on the first point: as Portes says, those low rates reflect pessimism about British economic prospects, not optimism about its creditworthiness."

           Actually I think the first point to make about this is that the low British rates belie that there is any need for austerity. The reality is that all countries that have their own printing press have historically low rates-the US, Britain, Japan, Canada, Switzerland, etc.

          As for defense #2 I have seen that a lot. Sumner is always pointing out the high deficits in Britain as proof there's been no austerity. That's fallacious of course as austerity brings down tax revenues which raises the deficit higher. Sumner has recently at least acknowledged the "sophisticated" Keynesian argument-like his argument that low interest rates indicate tight rather than loose money.

         Krugman points out that:

         "On the second, a couple of things to bear in mind. First, spending as a share of GDP tends to rise in an economic slump even without a change in policy, both because GDP is smaller and because safety-net programs kick in. As a result, UK spending as a percentage of GDP shot up between 2007 and 2009."

         "What about since then? I’m suspicious of the IMF numbers on potential output, which seem too pessimistic to me. But for what it’s worth, they say that the output gap — the degree to which Britain has been operating below potential — hasn’t changed much since 2009."

          As for the talk about the US-we are doing some austerity but not as much. Basically we've had austerity lite in the US-thanks to Obama we haven't had more. And for this reason we haven't dipped back into recession.