How Would Paul Krugman Fix The UK Economy?

We know what Paul Krugman thinks is the proper way of getting the US economy jump started: Massive fiscal stimulus to counteract the demand destruction.

It’s kind of boilerplate Keynesianism, but we see the attraction of this logic. In bad times, the government makes up for the under-consumption. In the good times the government pulls back*, and everything smooths out.

That being said, the built-in assumption is that the government can spend or borrow without any limits. The bigger the demand destruction the more a large fiscal stimulus is called for and that’s that. And throughout the past several decades this has held fine in the US. Foreign investors have been more than happy to finance our public spending, and even today, with annual deficits running at $1.5 trillion+, it’s still not a problem finding lenders.

But we wonder, what would Krugman’s advice be in the UK? See, there isn’t an unlimited appetite for UK debt like there is for US debt. Yesterday they had a bond auction fail, and the nation’s central banker is seriously worried that if Prime Minister Gordon Brown undertakes a massive stimulus program, the nation simply won’t be able to afford it.

So what would Paul Krugman say if he were writing in The Guardian for a British audience hoping to influence UK policy? He’d have to acknowledge the government’s borrowing problems, right? And thus he’d have to acknowledge that a spend-spend-spend attitude might not apply in the UK’s situation.

It’s an important question, because if you think about it, the US is the exception to the global norm, and that we’ve never faced real limitations on our borrowing. But throughout time and geography, that’s hasn’t been the case for most government. Governments have to face fiscal realities just like anyone other party.

And if this whole theory really only works in the US where we can borrow infinitely, is it really such a robust theory?

*As an aside, does anyone recall a time when Krugman advocated the government pull back on spending during a boom time? We don’t.

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