Tuesday, February 16, 2010

Does Rubinomics Apply to the UK?

With hat tip to Paul Krugman, ponder the following from a few prominent economists:

IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world. In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely. In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.

Paul tackles what he calls a “UK version of 21st century Hooverism” thusly:

As you might guess, I’m very much in agreement with the second group. It’s important to be clear that the call for immediate austerity isn’t grounded in unarguable economics; in fact, the arithmetic tells you that what Britain does in the next year or two is virtually irrelevant to its long-run solvency. Instead, the call for immediate austerity is based on an appeal to “credibility”, which is very much in the eye of the beholder. So for Britain’s sake, I hope that the UK version of 21st century Hooverism doesn’t prevail.

This notion of these prominent economists that medium fiscal restraint could aid recovery via lower long-term interest rates used to be called Rubinomics during the Clinton years. But then the U.S. had higher interest rates than we do now. Currently, short-term interest rates in the U.S. are near zero while the interest rate on 20-year government bonds averaged about 4.5% last month. So how does the UK situation compare? Well, their short-term interest rates are only slightly higher while the interest rate for their 20-year government bonds averaged about 4.4% last month.


rosserjb@jmu.edu said...

Well, the UK does seem to be facing harder choices than the US. Inflation seems to be picking up, in contrast to the US, even as they continue to be behind in terms of getting out of the recession. Not a pretty picture.

Charley said...

F__K Paul Krugman and the horse he rode in on. He hasn't had an original thought in his life, and continues in that fine tradition with his latest call for higher inflation as a means of cutting wages.

rosserjb@jmu.edu said...


I have been quite critical of Krugman on a number of grounds, including here. But even if one disagrees with his analysis on this, it is not remotely correct to say that "He hasn't had an original thought in his life." I could list quite a few.

Anonymous said...


Perhaps you beter lst an original thought of Krugman's that was correct. Not just original but relevant to the real world.

I would be interested in seeing this list.


Anonymous said...

If anyone is interested I can post a document [as an attachment] about what written by Krugman about what Krugman thinks of Post Keynesian economics. since I do not know how to send an attachment to this blog, someone either send me directions for posting the attachment on this blog or your emai laddress on this blog and I will ssend you the attachment.

PaulJust send

vimothy said...

But Rubinomics is to blame for this whole mess!