Macroeconomic Policy Wagers, by Paul Krugman, in NY Times: One of key arguments made by the proponents of fiscal austerity, even in a deeply depressed economy, has involved a sort of macroeconomic version of Pascal’s wager. Yes, the more open-minded admit, borrowing costs are very low in the US and the UK. Yes, the arithmetic suggests that cutting spending now will do very little to improve the long-run fiscal prospect. But you never know – maybe the last trillion dollars of spending will be what causes a sudden loss of market confidence, turning you into Greeeeeeece. (Cue scary noises).
Leave on one side the enormous difference between countries that do and don’t have their own currencies (and debt in their own currencies). Let me instead point out that there are other risks in the world.
Specifically, if allowing an economy to remain persistently depressed reduces long-run growth prospects — and there’s pretty good evidence to that effect — then austerity in a depressed economy has enormous costs, and may even lead to a vicious circle of shrinking potential leading to even more austerity and so on. Indeed, maybe that’s happening to the Cameron government right now.
So will the austerians admit that they might be making a terrible mistake, that far from safeguarding the future they may be destroying it?