Nuclear Deterrence and government spending, no matter what anybody with an armchair degree in Game-Theory might try and tell you, have very little in common. However, the coalition government is doing a very good job of at least presenting them as distant cousins.
In the 1950s the Eisenhower administration adopted a strategic posture known as the ‘New Look’. Central to this was the concept of Massive Retaliation – the idea that any incursion of the Soviet Union into the US sphere of influence would be met with atomic strikes (and later Thermo-nuclear strikes) on Warsaw Pact counter-value targets (industrial and population centres). This would act not only as a deterrent to Soviet aggression, but it would also offset the superiority of Soviet conventional forces and act as an economiser, giving ‘more bang for the buck’.
By 1956 the policy of Massive Retaliation was under severe strain. The advent of the Soviet Hydrogen bomb had fundamentally altered the stakes of the game. Now, if the US responded to minor Soviet infractions with nuclear weapons her own territory (and that of Western Europe) would be targeted by Soviet nuclear weapons. In a nutshell this is the much misunderstood concept of Mutually Assured Destruction (MAD). As Dr.Oppenheimer, the scientific director of the Manhattan Project, elaborated, the two superpowers would be like “two scorpions in a bottle”. Any US President would be faced with a situation of suicide or surrender – a binary which had the potential to undermine the credibility of deterrence (and indeed very nearly did during the Korean War and Hungarian Uprising of 1956).
Clegg, Cameron and Osbourne have done a brilliant job of creating their own false choice – that of economic apocalypse or draconian spending cuts. This has, somewhat surprisingly, taken hold in the public consciousness, with polls suggesting that around 60% of people agree with the gruesome threesome.
But, in the past week the IFS, two Nobel-Prize winning economists and a prime mover and shaker in the currency markets have all rubbished the Coalition narrative on cuts.
Paul Krugman, writing in the New York Times, dismissed the necessity of such drastic spending cuts arguing that the exact opposite was needed – state sourced fiscal stimulation.“As evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea”. He added that the idea that markets would be more confident under an austerity government “has no basis in reality”.
Krugman’s fellow Nobel-Prize laureate Professor Christopher Pissarides similarly criticised the CSR. According to Pissarides the threat of a Greek-style sovereign debt crisis in Britain has been grossly, and purposefully over-exaggerated.
“Unemployment is high and job vacancies few. By taking the action that the Chancellor outlined in his statement, this situation might well become worse. These risks were not necessary at this point. He could have outlined a clear deficit-reduction plan over the next five years, postponing more of the cuts, until recovery became less fragile. The ‘sovereign risk’ would have been minimal.”
Currency trader John Taylor was less diplomatic, saying that the spending cuts were tantamount to economic insanity.
George Osbourne must be starting to get hot under the collar. Criticism from the cornerstones of academia and the market-system are harder to shake off than others. One wonders whether the coalition will adopt a ‘flexible response’ as the going gets tough or continue with its ‘no plan B’ strategy. The ideological nature of the cuts suggest the latter.
Either way, the writing on the wall doesn’t look good.
- Nobel laureate criticises Osborne (bbc.co.uk)
- Chancellor ‘exaggerated sovereign risk’ says Nobel laureate (independent.co.uk)
- UK’s Nobel economics laureate Christopher Pissarides warns chancellor: don’t axe jobless benefits (guardian.co.uk)