The bad gross domestic product number for Britain, announced on April 27, wasn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s doubleplusungood: zero growth over the past six months, with every reason to be worried looking forward, as Prime Minister David Cameron’s austerity bites deeper.
Jonathan Portes, director of the National Institute of Economic and Social Research in Britain, got to the nub of it in an article for the Financial Times that day: “On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved,” he wrote.
“Meanwhile, the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction — or the lack of it — to the Standard & Poor’s outlook warning last week in America, where U.S. Treasury yields hardly budged.”
In short, there is no confidence fairy; and S.&P. can call invisible bond vigilantes from the vasty deep, but they won’t actually come when called.
Mr. Portes hits, in particular, on a point I’ve tried to make a number of times: Right now, we’re living in a world in which basic economics points to conclusions utterly at odds with what Very Serious People are supposed to believe, and in which radical outsiders base their views on standard economics while orthodox types turn to heterodox, highly dubious speculations.
Economics 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary.
Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary. And they clung to this belief even as the supposed historical evidence in favor of expansionary austerity was thoroughly debunked.
And now we’re watching Economics 101 in the process of being confirmed. I wish I thought this would change anyone’s mind.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.