Fiscal Policy: A Counterexample for Krugman
By David Henderson
Blame Canada for contradicting Krugman.
Paul Krugman writes:
And bear this in mind: no country has driven itself into a debt crisis with stimulus — nor has any country with significant debt regained investor confidence through austerity.
Actually, the last clause is false. The Canadian government, under the Liberal Party, turned around its serious debt crisis between 1995 and 2006. As I wrote in “Canada’s Budget Triumph”:
The result of years of cuts in government spending was that, as a percent of GDP, federal spending on programs fell from a high of 17.5 percent in 1992-93 to 11.3 percent in 2000-01.
The Canadian government had lost its AAA rating on its government debt in 1992; after 7 years of austerity, from 1995 to 2002, it regained its AAA rating.
HT to Robert Murphy.