EK: To go back to Krugman, if he were sitting here, he’d say in this crisis there’s been no evidence anywhere that cutting deficits leads to growth. We’ve not seen it in the euro zone or the UK. And he’d say the Reinhart/Rogoff story is a correlation story. It doesn’t prove that high debt always and everywhere hurts growth.
TC: Go look at Sweden. Here’s what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And they’re the fastest growing with a decline in their debt-to-GDP ratio.
EK: But correct me if I’m wrong, but if I recall, Sweden’s monetary policy went towards a very sharp devaluation, they’ve been driven by export growth, and alongside Israel, they’ve been more aggressive than any other central bank in the world. They’ve done stuff that if we did it here, people would lose their minds.
TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now they’ve moved back. And it’s not a perfect example, but it’s an exception to the Krugman story.
The entire dialogue is interesting, noting that, as Ezra points out, Coburn is more worried about inflation than he needs to be.