Nobel Economics Laureate and New York Times columnist Paul Krugman breaks apart the thinking behind the Tories’ approach to the economy:

Underlying the drive for even more austerity is the belief that the underlying economic potential of the British economy has fallen sharply, and will grow only slowly from now on. But why? There’s a discussion in the Office for Budget Responsibility report, p. 54, that basically throws up its hands — hey, these things happen after financial crises, it says, and cites an IMF report(pdf).

So I wonder: did they read the abstract of that report? Because here’s what it says:

Short-run fiscal and monetary stimulus is associated with smaller medium-run deviations of output and growth from the precrisis trend.

That is, history says that a financial crisis reduces long-run growth potentialif policymakers don’t limit the short-run damage it does.

And yet what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …

It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.

And the truly awful thing is that Cameron and Osborne are so deeply identified with the austerity doctrine that they can’t change course without effectively destroying themselves politically.

Translation: we’re screwed, the Tories know we’re screwed but they aren’t going to change course because they’re embarrassed. Anyone still think you can run a country’s finances like a household’s?

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