Hanke: Krugman is wrong, again
Margaret Thatcher also made a dash for confidence and growth via a fiscal squeeze. To restart the economy in 1981, Thatcher instituted a fierce attack on the British deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to the Times of London, they wrote a knee-jerk Keynesian (Prof. Krugman-type) response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”
Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures than the economy boomed. People had confidence in Britain again, and Thatcher was able to introduce a long series of deep free-market reforms. While Prof. Krugman’s authority is weighty, his arguments and evidence are slender.
Hanke follows up, mentioning a similar New Zealand example here. More discussion on Marginal Revolution here.
Comments
Carmen Reinhart from UMD recently testified that debt topping 90% of GDP slows growth. We're at 93% now. Harvard's Robert Barro empirically proved that the Keynesian multiplier has a negative real world effect: http://online.wsj.com/article/SB10001424052748704471504574440723298786310.html
Posted by: Josh | June 10, 2010 9:51 AM
I've been away for a few days and was not able to post comments, so please excuse my delay in responding to Hanke's comments.
Krugman anticipated Hanke in his book Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations, published in 1994. A sizable limited preview of the book can be found online here: http://bit.ly/dzoQdD.
Beginning at page 172, Krugman makes a compelling case that Thatcher's policies were not terribly effective insofar as they first increased unemployment and then reduced savings. Since Hanke's meme is gaining a fairly wide viewership, I expect that there will be a counter-attack forthcoming shortly either by Krugman himself or someone on the same side, such as Brad DeLong.
Posted by: Stuart Levine | June 13, 2010 12:37 AM