On Friday my copy of the New York Times contained something very unusual: an article by Paul Krugman that I (partly) agreed with. Greece's predicament, he said, is not just a matter of excessive debt. Its public debt is 113% of GDP, which is certainly high, but other countries have dealt with similar problems. After the Second World War, for example, the US had a federal debt equal to 122% of GDP, yet investors were relaxed, because the US economy had plenty of growth potential. In 1946 the federal government owed $271 billion; by 1956, it owed roughly the same, $274 billion. But GDP roughly doubled in that ten-year period, halving the debt problem.
Krugman uses this as an argument for more stimulus spending, which is of course up the wall. Taking cash out of productive, entrepreneurial enterprises and giving it to bureaucrats to pass on to other initiatives that they think might create jobs is a long-term road to ruin. For every Keynesian public-spending accelerator, there is a Friedmanite private-sector decelerator.
The chance of corrupt, over-spent Greece, shackled by the Euro, doubling its GDP in any foreseeable decade is of course zero. That might not be true of Britain, though, if it can shake off the shackles of Gordon Brown's taxing/borrowing/spending obsession. A growth (not a stimulus) policy would be a perfectly sensible plan for taming Britain's debt. But the new 50% income tax rate, and higher National Insurance Contributions are, as businesspeople have been saying, not the way to stimulate growth and therefore debt repayment and recovery. Rather, we need reductions in taxes, particularly taxes on work (income tax), job-creation (NICs) and enterprise (corporation tax). Sending home a few quangos would help too. If we cannot get politicians on any side to curb their spending beyond pitifully pointless (£12 billion) amounts, can we get them to go for growth?
