Nobel laureate Paul Krugman said the U.K. government should drop its commitment to fiscal cutbacks and boost spending to avert an extended downturn in the economy.
In a “depressed economy” officials should realize that “this is the time for the government to act as the spender of last resort,” he said yesterday in a speech at the London School of Economics. “Supplement that with exotic monetary policy. If you want to worry about debt and deficits, fine, but this is the time, to quote St. Augustine, to say ‘Oh Lord, make me chaste and continent, but not yet.’”
The economy slid into its first double-dip recession since the 1970s amid the financial crisis in Europe and Prime Minister David Cameron’s commitment to the biggest fiscal squeeze since World War II. The Conservative-led coalition government, which took office two years ago, has said its fiscal program has benefited Britain by keeping bond yields low.
“When the current coalition came to power the whole strategy was based around the belief that austerity would be expansionary” and that “it would inspire confidence,” said Krugman, a Princeton University professor. “But the promised expansion in private spending never happened.”
Krugman said the focus on reducing the U.K.’s ratio of debt to gross domestic product doesn’t need to be the center of policy because Britain, like the U.S., has the benefit of being able to borrow in its own currency. The yield on the five-year gilt fell to a record low of 0.716 percent on May 25.
“The idea that a country like the U.K. or U.S. is about to face a Greek-style crisis any day now doesn’t fit the record,” he said. “The bond market is saying ‘borrow, borrow!’ This isn’t a bad time to do that, it’s only the politicians who are saying otherwise.”
Governments should use tools that increase growth before altering central bank policies, Krugman said. Asked about the Bank of England’s program of so-called quantitative easing, he said policy makers should consider raising their inflation target, now at 2 percent.
“Buying unconventional assets by the central bank is operating on a margin that’s probably not very effective,” he said. “I’m not against it, I’m basically willing to try anything. A higher inflation target will reduce debt burdens, reduce the incentive to sit on cash, that’s also possible.”
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