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Sorry, we can't escape the pain

Some of you may have been following the "austerity versus stimulus" debate in the Financial Times.

Certainly, Paul Krugman has. The Nobel Laureate has been firing off all sorts of comments on his New York Times blogsite, "The Conscience of a Liberal", in response to those views he finds particularly abhorrent. Ken Rogoff, the joint author of the excellent This Time Is Different, has been one victim. Another has been Jean-Claude Trichet, the president of the European Central Bank, whose preference for fiscal belt-tightening has been met with the full force of Mr Krugman's Keynesian ridicule. In response to Mr Trichet's claim that "consolidation is a must", Mr Krugman offered the following:

"Ask yourself, what evidence does he present ...? None, because the reality is that bond markets don't look at all worried ... So what are we to rely on for his definitive judgement that 'consolidation is a must'? His 'understanding' that 'confidence is potentially at stake'. This is a basis for a policy that affects hundreds of millions of workers?"

Daring to criticise Mr Krugman is a very dangerous game, but I'm afraid to say that, on this occasion, his opinions don't really stack up. His mistakes relate, in part, to his observations on interest rates. He seems to think that (i) low government interest rates are here to stay, thereby ruling out a Greek-style fiscal crisis for the Western world as a whole, and (ii) that, if interest rates do remain low, governments should borrow more and more, safe in the knowledge that their extra borrowing will, eventually, deliver the kind of Keynesian multiplier needed to deliver a much-needed rebound in economic growth.

Should foreign creditors eventually walk away (put off by the recommendations of Mr Krugman and his ilk), the excess consumption of the current generation of US workers would crimp the spending power of future generations via a weaker dollar and higher interest rates. Austerity can be postponed, but it cannot easily be avoided altogether.