Paul Krugman: Old-fashioned Austerity


Matthew Yglesias piles on Michael Kinsley too, and makes a point I’ve also tried to make in the past: if the real problem is that we overspent and lived beyond our means, we should be working harder, not throwing millions of people into unemployment. Yglesias makes his point with the case of Iceland, which has indeed restored relatively full employment while continuing to suffer somewhat reduced real income.

But there’s an even better example from the historical record: Britain after World War II.

In fact, when people used to refer to Austerity Britain, they were referring to the half-dozen years after the war when Britain had very high public debt, much reduced overseas assets, and in general found its economic situation much straitened.

So what was the British economy like? Well, there was rationing, which people hated. There were exchange controls. There was financial repression. All very terrible things, unacceptable by modern standards, right? But there was full employment! Here’s a chart from here, mysteriously missing the year labels, but you can see the war clearly:

And here’s UK public debt as a percentage of GDP over the same period:

So, our grandfathers (or strictly speaking the grandfathers of the Brits — we never had austerity of any kind) — responded to high levels of debt with an economy in which life was pretty hard for investors, luxuries were hard to come by even for the middle class, and everyone worked hard — but, you know, everyone had a job. We’ve responded to much lower levels of debt by ensuring that the economy functions far below potential, millions of people who want to work can’t find jobs, and many people see all their hopes for the future slipping away.


Old-fashioned Austerity –

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