The title may sound baffling but the subject is at the heart of the debate about how to revive growth in the Western world.

Paul Krugman is a Nobel laureate in economics and writes a column for the New York Times. Professor Krugman is arguably America's most influential Keynesian economist, someone who sees spending cuts and tax rises as exactly the wrong prescription for Europe's or America's economic woes.

In June Professor Krugman took issue with those who saw deep cuts in public spending in Estonia and the subsequent rebound in growth as a model of successful austerity. He tweeted, "So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?".

This prompted a furious reaction from Estonia's President, who, in a series of tweets called Professor Krugman, "smug, overbearing and patronising".

Professor Krugman's view is that, while the Estonian growth has rebounded in the last 3 years, the economy is still almost 10% smaller than at its peak in 2007. On this measure deep cuts in public spending and tax rises have failed. To Professor Krugman Estonia provides a cautionary tale for the US of the damaging effects of aggressive fiscal retrenchment.

Estonia's Finance Minister, Jürgen Ligi, has a different view. In his remarks at LSE Mr Ligi argued that Estonia's deep recession was an inevitable response to the bursting of a credit and asset price bubble, not the result of government austerity. Pre-crisis GDP had been artificially inflated by the boom and it was unrealistic to expect the economy to return to such levels swiftly. Growth depended on make the private sector more flexible and competitive, not on government spending.  For Mr Ligi, Estonia's experience shows why the euro area needs more austerity and reform, not less.

The arguments are complex and the issues contested. But here are some of the facts behind the debate.

The Estonian economy suffered a huge, near 20% contraction in 2008-09 and it will take years of growth to regain this peak. Estonia has fared better in recent years than other smaller economies which suffered boom bust cycles such as Greece or Portugal. The IMF forecasts that Estonia will grow at 3.5% over the next 5 years, just half its pre crisis average, but a stronger growth rate and rate of recovery than in Greece, Portugal, Spain, Ireland or Italy.

A fundamental difference of opinion about government borrowing and government activity lies at the heart of the disagreement between Professor Krugman and the Estonian government.

To Professor Krugman ultra-low government bond yields are a symptom of economic weakness and demonstrate the need for the state to boost demand. In such circumstances governments – or at least those, such as the US and UK, which control their own currency - should take advantage of low interest rates to borrow, spend and boost demand. Stronger activity, in turn, will create a virtuous circle of growth and a narrowing budget deficit.

The Estonian view is that no country, especially small ones, should take the goodwill of the bond market for granted. They worry that high levels of borrowing and doubts about the public finances could cause bond yields to rise sharply, as they have in the south of Europe. Growth will necessarily be more subdued without the cheap and easy credit of the boom years. To the extent that the economy can grow, that growth must come from the private sector, not the state.

This is an old debate. In 1932 two of the twentieth century's greatest economic thinkers, John Maynard Keynes and Friedrich Hayek, debated how government should respond to the Great Depression in this extraordinary exchange of letters in the Times:

http://thinkmarkets.files.wordpress.com/2010/06/keynes-hayek-1932-cambridgelse.pdf

 The debate rumbles on 80 years later. As New York Union Professor Mario Rizzo puts it, "The great debate is still Keynes versus Hayek. All else is footnote".

Today the climate of opinion among international policy makers on public spending seems to be shifting.

Last week the International Monetary Fund (IMF), a staunch advocate of "sound" finances, suggested that countries with "room to manoeuvre" should smooth the adjustment in public finances, "over 2013 and beyond". We take this to mean that the IMF believes that countries such as Germany, the US and UK which have low government yields, can slow the pace of cuts in public spending to support growth.

For an organisation nicknamed "It's Mostly Fiscal" for its support for austerity this marks a significant change in thinking. The goal of eliminating deficits remains the same, but the IMF is giving a green light to more creditworthy governments to ease the pace of austerity.