Between Paul Krugman’s call for massive stimulus and the demands of the austerity hawks lies a third way: ‘aust-imulus’.

By Steven Hill

"Paul Krugman bases much of his call for massive amounts of stimulus on the American experience during the Great Depression.' Photograph: Bettmann/CORBIS

Few subjects have so bitterly divided our insecure times than the double-edged sword of stimulus versus austerity. Consensus over which course will end the current economic malaise has eluded the duelling experts. Without clearer signals of success, many nations have tried a confused mix of both – let’s call it “aust-imulus”.

While I tend to lean Keynesian, the case for fiscal stimulus is hardly the slam dunk that its most strident proponents claim. Nobel prize-winning economist Paul Krugman bases much of his call for massive amounts of stimulus on the American experience during the Great Depression. In Krugman’s view, the policy intervention that finally lifted the sinking boats was an unprecedented amount of spending by the US government for its wartime effort.

But this viewpoint ignores a fairly obvious counterpoint. The United States emerged from the Second World War as the world’s conqueror with virtually every economic competitor destroyed. America was the big boy on the block, and our industries enjoyed numerous competitive advantages over international rivals. The dollar suddenly was the dominant global currency, and that granted Americans cheap money and influence.

In addition, we then launched the ambitious Marshall plan which not only rebuilt our former adversaries but also created international markets for US producers. One of the conditions for nations to receive Marshall plan funding was giving preferred access to American exporters. The Marshall plan years from 1948 to 1952 saw one of the fastest periods of growth in European history, and American businesses profited greatly from their privileged position in these fast emerging markets. Any huge stimulus plan today would not benefit from those advantages.

Krugman has rejected this critique, writing that “trade was a minor factor in the American economy both before and immediately after the war, with imports and exports a much smaller share of gross domestic product than they are now”. Krugman admits that there was an increase in US trade for a few years due to the Marshall plan, but its impact “was temporary”, he says. Read more…

As published in www.guardian.co.uk on January 22, 2012.


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