Economists’ ‘Manifesto’ Questions Wisdom of Austerity

For the RES Newsletter, July 2012, Online Issue 3

As the European Union summit got underway in late June 2012, Nobel laureate Paul Krugman and LSE professor Richard Layard lay down a challenge to the seeming orthodoxy which says that public deficits are the main cause of the present economic stagnation.

In their ‘A Manifesto for Economic Sense’, published in the Financial Times on Thursday 28 June 2012, they invited all economists to join on the manifesto’s website in condemning excessive fiscal austerity.

They review the main arguments put forward in favour of austerity and find them contradicted by the evidence:

• Previous fiscal contractions have not stimulated recovery but have undermined confidence and productive investment, rather than restoring it.
• Structural issues are not a central cause of today's unemployment, since it pervades all sectors of the economy.
• High deficits need not cause high interest rates. Rates of interest in the United States and the UK are extremely low despite high deficits and debt, and high rates in Spain and Italy are due to the absence of a normal central bank.

The manifesto is available on the FT website and here: www.manifestoforeconomicsense.org

Comments can be sent for publication as correspondence to Peter Howells,
editor of this Newsletter.